Growing a business:
Lease or buy?
The main ways to obtain the use of an asset are:
- Outright purchase, financed for example by cash or a bank loan.
Hire purchase, where you pay for the asset over a fixed period and own the asset once it is paid for. - Finance leasing, where you pay for the asset over its expected life. If you want to continue to use it after this time, you generally pay a nominal rent. Whilst you never technically own the asset, you are responsible for maintaining and insuring it. The leasing company will not want it back.
- Operating leasing, where you rent the asset for a shorter term than its useful life. The leasing company will repair and insure it and will want the asset back at the end of the lease.
- Contract hire, where you rent an asset for a short period only. Cars and vans are often hired in this way.
If you do not want to use the asset for its full working life then contract hire or operating leases may be your best option. Assets acquired in this way are not included as fixed assets on your balance sheet, and the rent is allowed as a business expense.
Whilst the outright purchase, hire purchase or finance leasing options all give you actual or effective ownership of an asset, with the asset being included in your balance sheet, they have differing tax treatments.
With an outright purchase or a hire purchase, you can reclaim the VAT on the asset when it is acquired and obtain tax relief by way of capital allowances. You can claim tax relief on the interest charge.
With a finance lease, you can reclaim the VAT (or half of it in the case of a motor vehicle) when each instalment is payable. You are not eligible to claim any capital allowances on the asset. Tax relief is generally given for the interest and depreciation charges where these have been calculated under accepted accounting principles. Your relief is restricted where you lease a car with a market value in excess of £12,000 – there is a permanent disallowance of a proportion of the cost based on the application of a formula.
To determine whether it is more cost effective to acquire an asset by outright purchase, hire purchase or finance lease, you should consider:
- The impact of the timing of the payments on your cash flow
- The value of the asset at the end of the lease term
- Interest rates (for example variable rate on a bank loan versus fixed rate in a lease agreement)
- Tax efficiency (which will depend on your particular business situation)
 |  | Related literature: |
| |
Where next?
Within Obtaining finance…
Within Growing a business…
General...
- Contact us about this issue
- Read about how we can help you & your family
- Request a meeting with us
