When businesses want to acquire assets they can either pay for them upfront with cash, or they can finance the purchase (i.e., spread the cost) via a finance lease or hire purchase.
Both finance leases and hire purchases make it possible for businesses to buy the equipment, machinery and vehicles that they need to achieve short-term goals and maximise their long-term success, but what are the differences between them?
Leasing enables your business to use assets in exchange for rental payments over a fixed or minimum term. At the end of the contract, you can continue renting the asset, return them, or, in some cases, replace the equipment.
There are different types of leasing options. The most common is a straightforward finance lease which means you are responsible for paying for most of the asset’s cost over its life, and you’re also responsible for maintaining the asset as if you own it. You might also consider an operating lease which means you won’t pay for the full cost of the asset as you’re renting it for a period shorter than its useful life. As a result, the lease provider retains the risk and reward of ownership, while you remain responsible for keeping the asset in good working order during the agreement period.
Leasing works where the finance company pays the supplier for the equipment and in turn then becomes legal owners of the equipment, they then lease/hire the equipment back to the end user, the payments are charged plus VAT, which can be reclaimed as normal.
With a hire purchase you agree to buy an asset from the lender but spread the cost over a specified period. You typically pay a deposit upfront and the finance company then charge a regular fixed payment. The last payment has an additional option to purchase fee which transfers legal title to your business. Unlike a lease, you will own the item at the end of the contract.
As the asset is paid for by the finance company, they will want the VAT to be paid up front on the cost of the equipment, this can be claimed back as normal.
There are several benefits to leasing, naturally a big one is retaining cash, why pay out for something upfront when you can pay over time for it. Another significant advantage are the tax savings, Leasing is highly tax efficient method of acquiring equipment whilst spreading the cost of paying for it.
You have the legal right over the asset allowing you to claim capital allowances including any enhanced capital allowances that maybe available. Also subject to you making all the payments you will become the legal owner of the asset.
We know finance can be complex and often it's easier to talk things through. Drop us a message or give us a call 0330 135 8660 and we'll get back to you ASAP.
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