17, May 2012
Companies looking to obtain new equipment and goods could be missing a trick by buying rather than leasing – and there are benefits for the lessor, too…
Leasing business equipment and systems has traditionally been less popular in the UK than in countries such as the US, where it is extremely well established. But the leasing industry is growing, and there are clear benefits to be had for companies of all sizes and sectors.
As an FD, you will be well aware that, in the current economic climate, leasing can deliver many benefits – not least freeing up capital to be invested elsewhere in the business.
But there are other benefits, too. One is that leasing guards your business against the diminishing value of assets and, if you use an operating lease or contract hire, the responsibility for maintenance or servicing will be held by the lessor, as this will be part of the lease agreement. As such, the leasing company carries the risk if the equipment breaks down and there should be savings on these costs due to the increased purchasing power of the lessor. This allows you to focus on your core business activities without these distractions.
In addition, there may be other monetary and tax advantages. In most instances, you should be able deduct the full cost of lease rentals from taxable income. On leases of more than seven years, and sometimes of more than five years, known as long-funding leases, only part of the lease rental is allowable but you can usually claim capital allowances on the cost of the assets.
Benefits for all
The benefits of leasing are not restricted to lessees either. For leasing companies there are advantages to be had around tax, too, which in theory can help keep the cost of leasing down for the lessee.
The greatest advantage for the lessor in relation to long-funding operating leases is tax relief by way of depreciation. If the lessor is in a high tax bracket, it can lease out assets with high depreciation rates and, therefore, as it will pay tax on the lease rentals received less depreciation, it can reduce its tax liability substantially. Agreements can be suitably structured so as to pass on some of this tax benefit to the customer.
Areas for consideration
Of course, there are disadvantages to leasing – in the longer term it can prove more
expensive to lease than to buy; not owning the product means you cannot add it to your asset sheet; some agreements will not include maintenance, for example, and businesses looking to make the most of tax advantages are likely to need technical guidance.
For example, the VAT treatment will depend upon whether the supply received is one of goods or services. Where it is contemplated that you will own the asset at the end of the lease or hire purchase period, there is a supply of goods for VAT purposes. The supplier will consequently charge VAT on the whole of the taxable amount at the start of the contract. Conversely, if you will not become the owner of the asset at the end of the arrangement, the supply is one of services. In that case, the supplier will charge VAT periodically throughout the lease or hire purchase period, ie, when payments are made or invoices are issued.
If you are registered for VAT, any input tax incurred on the supply that you receive should be recoverable if the asset is to be used by you to make taxable supplies and you have the necessary evidence to support a claim. If you own the asset at the end of the arrangement, it is also important to remember that you may have to account for VAT when it is eventually sold or given away.
Further help and information
However, the benefits of leasing are clear, and Grant Thornton has been working with a host of businesses to help them raise finance for, and make the most of, leasing opportunities, whether helping businesses raise finance – either for leasing or as a leasing company – or advising on tax issues and contracts.
For more information on Grant Thornton’s leasing advisory services, please visit our Leasing page.
This article is based on the current accounting and tax requirements. The International Accounting Standards Board (IASB) has an active project to develop a new approach to lease accounting. A revised Exposure Draft is expected to be issued by the IASB and Financial Accounting Standard Board later this year. The specific requirements are still being finalised, however it appears certain that all leases will be on balance sheet for lessees with lessors likely to need to de-recognise a part of the leased asset. Lessees and lessors need to consider the impact of these changes for future leasing decisions and also their business models.