Tax Implications of Leasing, Hire Purchase and Cash Purchase Agreements

Buy or lease…does it matter? Well it does for tax!

A business will usually get tax relief on plant and machinery it acquires, but the timing of the tax relief, and how it is given, depends on whether the business buys or [signs an equipment lease agreement]. The best way of demonstrating this is by looking at an example of a company that needs a new van.   The van in question has a list price of £18,000.

Cash Purchase

The cost of the van is not a revenue tax deductible expense, but tax relief is given in the form of capital allowances.  Depending on the company’s total capital expenditure in the period, 100% capital allowances should be due which would enable the full £18,000 to be offset against profit in year of purchase.

Hire Purchase

Under a hire purchase agreement, the company can spread the cost of the van over an agreed period usually with a balloon payment made at the end.  Although the company will not take ownership of the vehicle until the end of the agreement capital allowances are given as though the company made a cash purchase.  The full £18,000 can therefore be written off against profit in year 1 just like a cash purchase.

Finance Lease

The company would make fixed rental payments to the finance company over an agreed period, typically three to four years.  At the end of the finance lease the company can continue to rent the van for a peppercorn rent or sell the van to a third party and keep a proportion of the profits.  Despite being leased the van is treated as an asset of the company for accounting purposes, but tax relief is given on depreciation rather than via capital allowances.   As a result, tax relief is spread over the term of the agreement rather than being given in full in year 1.

Operating Lease

The company simply rents the van over a cancellable short-term period.  The payments are deducted from profit as a revenue expense over the course of the lease period. At Haines Watts Grimsby we provide valuable advice to business owners to help them maximise the tax relief available on their plant and machinery expenditure. So we are able to advise whether a hire purchase agreement or a lease agreement would be of more benefit to your business than a cash purchase. Please contact Nolan Gooch for assistance on 01472 355215.