Finance lease is a good option if you want to acquire new or used business assets with little or no cash outlay.
Cash-flow & VAT
One of the main advantages is that as the hirer you don’t pay VAT on the cost of the equipment at the start of the agreement.
You will however pay VAT on the rentals but this can be recovered in the usual way.
Finance Lease V Hire Purchase
Finance lease rentals are however 100% tax allowable and there are circumstances where it is still the most tax efficient option.
New Start Businesses
New start businesses will not necessarily benefit from the Annual Investment Allowance so the cash-flow advantages of a finance lease could prove attractive.
Larger companies and corporate businesses that have already exceeded the Annual Investment Allowance might find that they can write off new equipment and machinery more quickly via a finance lease than using hire purchase. Equipment such as IT, technology, office furniture and other rapidly depreciating assets could fall into this category.
Equipment financed using a finance lease is shown as an asset on a company’s balance sheet and unpaid rentals as a liability.
Broadly speaking, the lease rentals are divided into finance and capital elements and charged to the accounts accordingly.
For further information see HMRC note Finance Lease Accounting
Fixed Term or Minimum Term Lease
There are two main types of finance lease:
Fixed term leases run for a pre agreed period. At the end of the lease you can either extend or we will usually offer a title transfer deal.
Minimum term leases continue to run on when the minimum term is passed and you can continue to pay the lease providing all parties are in agreement.
Maintenance & Repairs
Finance leases are a form of business loan and as such the responsibility for servicing and maintenance of any plant, equipment or machinery rests with the hirer.
Leased assets should be insured comprehensively and details of the lender noted on your insurance policy.
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