Historically leasing was a much more frequently used type of finance agreement, but not always for the right reasons! Typical “copier dealer mentality” resulted in undisclosed, high rates and lack of ownership at the end of the term.
As a result reputable brokers now put far more emphasis on the phrase “finance options” as this encompasses all of the agreement types available to businesses when making a purchase. The correct agreement type for you will depend on many factors, and whilst your accountant will be able to provide you with rubber stamped advice, a good broker should be able to give you the characteristics and caveats of both.
When looking at asset finance you will see two main agreement types:
- Hire Purchase
- Lease or Rental
The headline repayment for both agreements should be the same, it is the VAT and accounting treatment of both agreements types that differ.
HIRE PURCHASE
Accounting
- Accounted for in the same way you would if you’d paid outright for the equipment, which will depend on the type of equipment you have purchased. Most purchases will qualify for an enhanced first year allowance either Full Expensing or Annual Investment Allowance. This means that you will be able to offset 100% of the net cost of the equipment against your profit, meaning you get full tax relief in year 1.
- The interest element is accounted for as an expense.
VAT
- All of the VAT on the cost is payable up front, along with the first rental or any lump sum deposit you are putting down. If you are VAT registered this can be claimed back in your next quarter in the usual way.
- VAT deferrals can be arranged so the VAT is collected in line with your next VAT quarter, minimising delay in reimbursement.
- The remaining monthly payments are VAT exempt.
Ownership
- There is an option to purchase fee at the end of the agreement which is typically around £150.00. This is contractual and once paid, the title to the equipment rests with your business
LEASE
There are two main types of lease agreement – Lease Rental and Finance Lease. The attributes of both are very similar, it is generally only the end of term arrangements that differ. Typically Lease Rental is used for assets with little to no residual value and Finance Lease is used for harder assets – those with residual value at the end of the term.
Accounting
- Each monthly payment (including the interest element) is accounted for as an expense, meaning the tax relief is spread over the term
VAT
- No VAT is payable up front
- Each monthly payment has a VAT element which can be reclaimed each VAT quarter if you are VAT registered
Ownership
- You will not be passed title, as the agreement was accounted for as a lease, however at Focus we always ensure you can keep/retain the equipment. This is generally for a one off nominal secondary rental equal to a monthly payment or 5% of the fair market value at the end of the term
It is worth noting that for standard assets, at the end of each agreement type, the tax relief is equal.
You may find this flyer on summarising the two differences useful to keep.
There are several things to consider when deciding which agreement type to opt for, some straight forward whilst others are less clear cut:
- Are you VAT registered?
- Does the equipment qualify as plant and machinery or is it an integral feature?
- Is the equipment new or used?
- How much profit do you anticipate making in this financial year?
- How much have you spent/do you anticipate spending on plant and machinery in this financial year?
- What are the end of term fees?
These answers can then be discussed with your broker and accountant to ensure you take out the right agreement for your business. This may even sometimes be a combination of hire purchase and lease, to maximise the tax relief available to you.
Whilst this is by no means an exhaustive list of the agreements that are out there, these are the main solutions we provide. Focus really enjoy providing a consultative approach to ensure that you receive the right solution for your business. By discussing your full year’s purchasing plans early days with your broker, it will help to maximise your tax relief and achieve the best rates for you.