Leasing or Buying Equipment

Small businesses have a finite amount of money to spend on plant and machinery that is required to operate the enterprise. Buying an asset such as a computer outright can at first glance seem the only option, but it's a good idea to also consider leasing the items.

Buying Outright

If you have the money you could opt to buy the assets you need outright.

Buying an asset outright has a number of advantages:

• You don't have to make regular monthly or quarterly payments.
• No interest will be charged, as there is no finance agreement in place if you pay cash.
• You own the item, which you could dispose of yourself at a later date to recoup some of its cost.

Buying an asset outright has a number of disadvantages:

• As you own the item, you are responsible for any costs if the asset breaks down.
• You can't upgrade your asset as you could with a lease.
• If you finance the purchase (through hire purchase for instance) of your asset you may be charged interest.
• There could be VAT implications if you use a hire purchase agreement.

Leasing an Asset

If you don't have the cash to buy an asset you need outright, leasing is an option that many small businesses use.

Leasing an asset has a number of advantages:

• You can replace the asset at the end of the lease with a more up-to-date model.
• You will usually have the option of buying the asset at a percentage of its current market value.
• The cost of your lease payments can usually be deducted as an expense against your tax liabilities.

Leasing an asset has a number of disadvantages:

• Your business never owns the asset.
• There could be VAT implications with some lease agreements.
• Leasing is almost always more expensive than purchasing the asset outright.

Types of Leases

Leasing can be an attractive option if you have to make substantial purchases. You have three types of lease to choose from:

Contract hire
This is often used to purchase vehicles, as the company leasing you the vehicle will usually offer a package that includes the cost of some maintenance and any repairs that may be required during the period of the lease.

Finance leasing
This type of lease is usually used for purchases over longer period - typically more than three years. You are responsible for the repair and maintenance of the asset. The lease agreement may also state that you have to dispose of the asset at the end of the lease agreement. You can read about the tax implications of this type of lease on the HMRC website: http://tinyurl.com/2wgk3z.

Operating leasing
Businesses that need to use specialised equipment for a short period of time often use this type of lease. At the end of the lease agreement the leasing company will take the asset back, and as they are also responsible for any repairs or maintenance, this type of lease is very versatile.

Buying or Leasing and the Taxman

Whether you decide to buy outright or lease an asset you have to think carefully about how that decision impacts on your business's tax liability. Talk to your accountant as buying or leasing assets at specific times of the year has an impact on how you can account for that asset for tax purposes.

Generally assets are capital allowances that can be offset against your business's profits. Note that it's important that you don't confuse depreciation where the wear and tear that an asset receives is written off. Depreciation is not an allowable expense that can be offset against tax, whereas capital allowances are.

Leasing or buying an asset is an important decision to make as you could be locked into an agreement for several years. Many businesses have a mixture of lease and bought assets. Take some advice about the kind of asset you need for your business to ensure you make the right choice about how you finance it.