We often get asked which is the best way to finance capital equipment. In short the answer can be subjective and we will always refer you to your own accountant. However we can provide you with the differences which will probably point you in the right direction.
A hire purchase and finance lease facility are both ways of funding capital expenditure requirement however they are structured in slightly different ways and have slightly different tax treatment.
With a hire purchase facility all the VAT must be paid up front with a deposit of usually 10% of the net amount. At the end of the agreement and with payment of the final payment an option to purchase fee is paid and legal title passes to the customer. The equipment is shown as an asset in the companys balance sheet from the onset of the hire purchase agreement with a corresponding liability for the finance agreement. Capital allowances are claimed on a reducing balance basis.
With a finance lease the equipment is still shown as an asset and liability in the balance sheet however there are several fundamental differences. Firstly the VAT is spread over the term of the agreement and paid with the monthly rentals. Therefore from a cash flow point of view finance lease can work better for some customers. Instead of claiming capital allowances the monthly rental is offset against the profit and loss account therefore the full benefit from a tax point of view is claimed over the exact period of the lease. This can be advantageous if the equipment being funded is high tech and will need to be replaced at he end of the agreement. However at the end of the agreement the finance lease will go into secondary rentals which are equivalent to one months rental being paid on an annual basis. Alternatively the kit can be sold and the customer retains typically 95% of the sale proceeds. The remaining 5% is paid to the finance company along with the VAT
Tags: finance lease, hire purchase
