Decide whether to lease or buy assets

The tax implications of buying and leasing equipment

Capital allowances allow you to offset the cost of capital assets against the taxable profits of your business.

Capital allowances are used instead of normal accounting depreciation, which you cannot offset against tax. They are defined and set by the government and they are often used as a way of encouraging certain types of investment.

You can claim your own capital allowances by using hire purchase or buying assets outright. With hire purchase agreements, your business is treated as the owner of the equipment and so you can claim capital allowances, offsetting the asset against your tax bill. You can also claim capital allowances if the lease is a long-funding lease (finance leases of more than seven years and in some cases more than five years; and some long-operating leases).

If your business reaches a low profit or loss, claiming the full capital allowances may not be worthwhile. With shorter leases - less than five years and sometimes less than seven - the leasing company will claim the capital allowances against its own profits and should pass on the savings to you in reduced rental charges. Businesses can usually deduct the full cost of lease rentals from taxable income as a trading expense where the lease is not a long-funding lease.

The pros and cons of leasing or renting business equipment

Leasing or renting an asset means you can free up working capital for use in other areas of your business and you don't need to take out large loans to pay for it.

You should think about leasing or renting equipment that has high maintenance costs, can quickly become outdated, or is only used occasionally.

Some advantages of leasing or renting equipment:

• you don't have to pay the full cost of the asset up front, so you don't use up your cash or have to borrow money
• you have access to a higher standard of equipment, which might be too expensive to buy outright
• you pay for the asset over the fixed period of time that you use it, which helps you to budget for the future
• as interest rates on monthly rental costs are usually fixed, it is easier for your business to forecast cashflow - for more information, see our guide on cashflow management: the basics
• you can spread the cost over a longer period of time and match payments to your income
• the business can usually deduct the full cost of lease rentals from taxable income
• you won't have to worry about an overdraft or other loan being withdrawn at short notice, forcing early repayment
• if you use an operating lease or contract hire, you may not have to worry about maintenance
• the leasing company carries the risks if the equipment breaks down
• the leasing company can usually get better deals on price than a small business could and will have superior product knowledge
• on long-funding leases (finance leases over seven years and sometimes over five years; and some long operating leases) you can claim capital allowances on the cost of the assets
• if you need to upgrade or replace the equipment, you can simply make a small adjustment to your regular payment rather than invest a lump sum upfront

Some disadvantages of leasing or renting equipment:

• you can't claim capital allowances on the leased assets if the lease period is for less than five years (and in some cases less than seven years)
• you may have to put down a deposit or make some payments in advance
• it can work out to be more expensive than if you buy the assets outright
• your business can be locked into inflexible medium or long-term agreements, which may be difficult to terminate
• leasing agreements can be more complex to manage than buying outright and may add to your administration
• your company normally has to be VAT-registered to take out a leasing agreement
• when you lease an asset, you don't own it, although you may be allowed to buy it at the end of the agreement

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