Although you never gain ownership of the equipment, a finance lease is similar to hire purchase in that you make regular fixed repayments over an agreed period, fully paying the cost of the equipment. A key difference though, is that VAT is payable on each lease payment rather than paying the full VAT due on the equipment at the outset of the agreement. At the end of the primary leasing period a nominal 'secondary lease period' annual payment is charged for continued use of the equipment. Alternatively you can arrange for the equipment to be sold to an unrelated third party for which you will receive the full sales proceeds.
Another key difference to the hire purchase option is that whilst you cannot claim capital allowances, you are able to offset the lease repayments against any taxable profit.
You are responsible for the maintenance and insurance of the equipment.
Key benefits of Finance Lease:
- Certainty that the finance agreement cannot be withdrawn as long as you continue to abide by the terms and conditions of the contract. This contrasts with bank overdrafts which are repayable upon demand.
- The regular nature of repayments, and fixed interest rate, makes budgeting easier.
- A cost effective way to fund acquisitions. Using a traditional bank overdraft to fund equipment purchases can result in a growing hardcore of debt that can prove more costly to your business in the long run.
- Enhanced business cash flow with the ability to spread VAT across the life of the lease agreement.
- A straightforward form of leasing which leaves you in a position to control the used equipment value.
