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Cash Purchase vs Finance Agreement

A profitable business was looking to purchase a new piece of equipment. The business wanted to explore the most cost effective and tax efficient method of payment.

Cash Purchase
Equipment Price £2500
Loss of return on capital investment or interest rate payable to bank at 8%

Year one £200
Year two £216
Year three £233
Total Loss £649

Writing Down allowance year 1 @ 50% £1250.00 x rate of tax 19% = £237.50
Writing Down allowance year 2 @ 25% £ 312.50 x rate of tax 19% =  £ 59.38
Writing Down allowance year 3 @ 25% £ 234.38  x rate of tax 19% =  £44.53

Total Tax allowances £341.41

Total cost                              £2500.00
Minus tax allowances          £ 341.41
Plus investment lost            £ 649.00 or interst payable to bank OD

Total Cost of paying cash  £2807.59

Finance Lease
£2500 financed over 3 years at £93.76 per month
Return on capital investment or not paying overdraft interest  at 8%.
Total gain £649*

Finance agreement 100% tax deductable
Total repayments = £3375.00
Tax allowances at 19% of £3375 =  £641.25

Total Payments                       £3375.00
Minus tax allowances              £641.25
Minus total gain *                     £649.00

Total Cost of finance Lease   £2084

Total cost of buying cash        £ 2807

Finance Lease therefore £723 cheaper then paying cash

*These figures are for illustration purposes and should not be relied upn to make an accurate assesment of your own taxation circumstances.

 

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