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 lease rental is 100% tax deductible, and 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.
Any capital allowances are passed on to you, and lease payments can be offset against taxable profits. VAT can also be reclaimed on monthly payments. 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 why an operating lease can be attractive. For this reason, leasing is often referred to as ‘off balance sheet’ financing – 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 (either Clear Asset Finance or assigned to a bank), which means the equipment does not show on the company’s balance sheet, therefore not needing to be depreciated over a fixed period.
Title to the equipment can be agreed with the seller or Clear Asset Finance as a separate agreement.
The disadvantage of buying equipment outright
The disadvantage to buying equipment out-right, is that the capital invested becomes a depreciating asset. This 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, and 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.
How the tax advantages of leasing works as an example in numbers
– You lease a machine that costs £5,000 + VAT, over a 3 year term.
– The monthly payments would be £188.25 + VAT over 36 months.
– Total paid over the term of the lease £6777.00.
– 19% tax can be reclaimed on the total lease payments over the 3 years, so a total of £1287.63.
– Therefore the net cost of the lease is £6777.00 – £1287.63 reclaimed tax = £5489.37.
– This makes leasing a very attractive option to keep your business up to date with needed equipment.