Purchase, borrow or lease? |
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Purchase outright, borrow from the bank or lease?
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This will depend on your circumstances, which is why it's important to work with a finance professional that has the expertise to offer you advice on the following:
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Purchasing outright
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What is it suitable for? ... any type of business asset. What does it involve? ... you purchase using cash and take ownership of the asset immediately. Are there any tax advantages? ... on the basis that your company owns the asset, you can claim capital allowances. The disadvantages of cash purchase are: you tie-up valuable cash resource, you own an asset that more than likely will depreciate over time, you will need to maintain and insure it while you use it and dispose of it at the end of its useful working life. Many companies feel that paying cash outright for capital assets places a significant drain on their company's working capital. It makes sense to ease your cash-flow through regular payments over an agreed period of time. |
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Hire purchase
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What is it suitable for? ... tangible business assets that have a medium to long life. What does it involve? ... you will make regular periodic payments over a fixed duration and eventually take ownership of the asset in full. How does it work? ... hire purchase enables you to eventually secure ownership of the new assets. The cost of the assets is spread over an agreed term. Payments will be linked to the useful working life of the asset and can be customised to suit particular business needs e.g. seasonal payments. Most deals are structured with an initial deposit, followed by periodic payments. The hire purchase company will retain title to the asset until it is paid for in full. Are there any tax advantages? ... from the commencement of the agreement your business is treated as the owner of the equipment, which means you can claim the writing down allowances. The interest element of the repayment can be deducted from taxable profits as a trading expense. |
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Bank borrowing
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What is it suitable for? ... any form of business asset, including land and property What does it involve? ... you will make regular payments on a loan or cover the cost through normal cashflow if it paid for from a current account. You will own the asset in full from day one. How does it work? ... the cost of the asset is spread over an agreed term. The repayment schedule will depend on the amount of money borrowed, loan duration and the rate of interest. You may be asked to make some contribution towards the purchase price. The bank is likely to want additional security from the company or the directors in support of the advance. Are there any tax advantages? ... from the commencement of the agreement, your business is treated as the owner of the equipment, which means you can claim capital allowances. The interest element is 100ax allowable. |
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Leasing
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What is it suitable for? ... leasing can be a good option for funding short life assets which need regularly upgrading e.g. computer systems and software. Alternatively, it is used to finance equipment over a period less than its full working life and which has an established second-hand user market e.g., passenger cars and commercial vehicles and construction equipment. What does it involve? ... fundamentally, an equipment lease is a usage agreement between an equipment owner (the lessor) and you, the user of the property (the lessee). With a leasing agreement you pay a pre-agreed rental over a set period. You will never own the asset. However, you have full use of it during the primary rental term. How does it work? ... lease agreements are arranged through independent leasing companies (typically bank based subsidiaries often referred to as third party lessors), captive leasing companies (owned by a manufacturer) and financial intermediaries (providing one or more services). The lessor will acquire the asset on your behalf and rent it to you for use in your business. There are three types of rental facilities: Are there any tax advantages? ... the leasing company claims the capital allowances and will take this into account when calculating your rental charges. Generally the full cost of contract hire can be treated as a revenue expense and rentals are fully allowable against taxable profit. This is a factor in determining whether you should lease rather buy. You can re-claim the VAT on lease and contract hire rental repayments. Special rules apply to business vehicles, where the amount you can reclaim is generally 50 percent. |
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Capital allowances - encouraging you to invest in your business
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As a business you can claim tax allowances, called capital allowances on certain purchases or investments. This means you can deduct a proportion of these costs from your taxable profits and reduce your tax bill. You can claim for passenger cars, commercial vehicles, plant and machinery along with many other expenses including energy-saving technology, premises and research and development. The amount of the allowance depends on what you're claiming for. In some cases, the rates are different in the year you make the purchase and subsequent years. For example, allowances range from 25 percent to 50 percent in the first year, up to 100 percent for assets such as low-emission vehicles.
The actual amount you can claim will depend on your individual circumstances. The information given here is general information only. You should always discuss claims with your professional advisors such as your accountant or tax specialist. You can claim additional allowances in the first year after the expenditure was made. For medium-sized businesses this first-year allowance is generally 40 percent of the expenditure.
In some cases you can claim 100 percent in the year you make the purchase. 100 percent allowances are available on specific types of efficient equipment, for example energy-saving machinery and low- emission vehicles. Note that "a year" refers to a tax year, not a calendar year. From the 2008/09 tax year, all businesses will have an Annual Investment Allowance on the first £50,000 of expenditure on plant and machinery. At the same time there will be a tax credit for losses incurred through capital expenditure on some types of environmentally friendly technologies.* |
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