Lease or Hire Purchase

Sooner or later the time comes in every business when it needs to replace that aging item of equipment or machinery – trucks, vans, computer systems, printing presses, forklift trucks, audio visual equipment, generators, furniture and so on – nothing lasts forever.  Most companies will need to use some form of third party finance and will inevitably look at the two options – lease or hire purchase.

But what exactly are the options and why do different solutions suit some businesses but not others?

Purchase Options

When we talk about buying assets on finance we are generally referring to either a hire purchase or lease purchase.  Don’t be confused by the term lease purchase, it’s simply a hire purchase with a different name.  The key clause of this type of agreement is that the title of the goods will pass to you on completion.  They are Purchase agreements and as such you will own the goods outright when all the payments have been made.

Leasing Options

Leasing, on the other hand, is quite different and the assets can only be bought if title is transferred via an unconnected third party.

There are two types of lease, finance lease and operating lease.

  1. Finance leases place the responsibility for the depreciation of the asset with you the lessee.  At the end of the lease you have to sell the equipment and settle any outstanding finance.
  2. Operating leases place the responsibility for the depreciation with the owner and at the end of the lease the equipment is handed back.

In both cases the assets are purchased and owned by the lessor and you pay a rental to use them.

Which is the Best Option for Your Business?

There are a number of factors to take into consideration when choosing the best option for your business.

Cash-flow

In business “cash is king”, without it you have no business and the most common cause of failure is when the cash runs out.  So when cash is short, the asset finance option that requires the smallest capital outlay is likely to be the one for you.

From this perspective, leasing is a real winner.  When goods are leased, the VAT on the cost of the equipment is paid by the lessor.  You then pay VAT on the rentals as and when they fall due.  On large items this can make a significant difference to the size of up-front payment required.

Corporation Tax

If the availability of cash is less of an issue, you will probably be looking for the most tax efficient option and this will depend upon the type of goods and the availability of tax allowances in your businesses.

In many cases, businesses that have not utilised their Annual Investment Allowance (AIA) will be able to write off the total cost of any new asset or equipment in the year it is purchased (company cars are specifically excluded).  Under these circumstances a hire purchase agreement is likely to be the best option.

However, if the AIA has been used up, it would be worth looking at leasing, especially for IT equipment and other items that depreciate rapidly.  Lease rentals can be charged as a tax allowable expense apportioned over the useful life of the asset in question.  So in some cases, a two or three year Lease might be more tax efficient than a Hire Purchase agreement.

Usage

Give some consideration as to what the items will be used for and how they will be treated.  All operating leases will have clauses relating to the condition of the goods on return.  For example, if you run a fleet of builders vans which are on and off site then you might be better off avoiding an operating lease and opting for a Hire Purchase or Finance Lease agreement.

Put the Finance in Place First

Before going out to shop for any new machinery or equipment, make sure you get the finance in place first.  It will mean that you can negotiate the best deal, confident in the knowledge that the right type of finance is ready and waiting to go.

Find a Reliable Equipment Supplier

Price is important but not if the goods don’t turn up, the installation is poor or there is no one to help if things go wrong.  So find a good supplier, someone that is well associated and has the experience to help.

Good Advice

We offer good advice on asset finance options and would be pleased to explain these in more detail.

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