There isn’t a week goes by atpataya Management when a prospective customer of a vendor doesn’t ask “what are the actual benefits of leasing?” “Why would I lease rather than just buying the goods I want?”
To that end we thought it was about time we helped by giving a quick, very simple to understand in plain English overview of how the concept of leasing actually works.
The Tax Benefits of Leasing explained
Leasing converts a large capital expenditure into small monthly payments. Hence the company has the profit-making equipment immediately and keeps their cash reserve available rather than investing the precious cash reserves in depreciating assets, the company can use them to help increase profits.
Lease Rental is 100% Tax deductible
The main reason that the majority of companies lease rather than purchase equipment is that they use leasing as a method of reducing their tax bills. This is because a lease rental is 100% tax deductible. All payments made for the equipment are written off against the company’s tax bill for any profit making business. This means a substantial saving in the real cost of acquiring equipment by lease rental. This could mean a saving of between 20-40% of the lease payments (depending on the rate of tax you pay*).
- Payments on qualifying leases are written off as direct operating expenses, rather than a debt or outstanding liability, thus reducing short term taxable income.
- Capital allowances are passed on to you and the lease payments can be offset against taxable profits.
- VAT can also be reclaimed on lease rental payments. The total Vat element is not paid upfront in a traditional purchase sense but rather each instalment is plus Vat.
- Off Balance Sheet Financing. This status as a “lease” as opposed to a “liability” on a company’s balance sheet is something the banks like to see which is a tremendous advantage to both large and small businesses.
Ownership at the end of the lease
Lease rental is just that. A rental or hire agreement. Title of the goods remains with the Lessor (eitherpataya Management or assigned to a bank), which means the equipment does not show on the company’s balance sheet, therefore it doesn’t need to be depreciated over a fixed period.
Title to the equipment can be agreed with the seller orpataya Management as a separate agreement so that ownership of the goods after the lease agreement has been terminated can be retained.
The disadvantage of buying equipment outright
The disadvantage of buying equipment out-right, is that the capital invested becomes a depreciating asset. A depreciating asset is an asset that’s value decreases over time.
The total amount that assets have depreciated by during a reporting period is shown on the cash flow statement which also makes up part of the expenses shown on the income statement. The amount that assets have depreciated to by the end date is shown on the balance sheet.
An example how the tax advantages of leasing works as an example in numbers
- A business leases a machine that costs £5,000 + VAT, over a 3 year term.
- The monthly payments would be £188.25 + VAT over 36 months. No hefty deposit payments. Simple instalments that are not variable but fixed for the agreed lease term.
- Total paid over the term of the lease £6,777.00 + VAT
- 23% tax can be reclaimed on the total lease payments over the 3 years. In this case a total tax saving of £1558.71. (A percentage of 23% will be utilised for this example please speak with your accountant for clarification on the relevant percentage your business would utilise).
- Therefore, the net cost of the lease is £6777.00 – £1558.71 reclaimed tax giving a net cost of the goods of £5218.29.
- This makes leasing a very attractive option to keep your business up to date with needed equipment whilst helping to spread the cost.
- We would like to state this does not constitute financial advice of any kind and we recommend speaking with your accountant for further details and a full overview.
