Sometimes it is interesting to step back and ask why we do things the way we do so I did that with our customers - more than 80% of whom opt for leasing when financing equipment.
The responses were interesting with the vast majority citing tax as the main criterion and most of the rest saying it was cashflow - in particular not having to stump up VAT.
We are not tax advisors and would never take it upon ourselves to offer tax advice, but if tax is really uppermost on your agenda I strongly advise that you take professional advice here.
A little bit of history; in its heyday leasing was the funding tool of choice for sophisticated businesses for a variety of reasons:
- Tax: Both lender and borrower benefited from tax allowances (with the borrower passing theirs back by way of reduced rentals).
- Cashflow: Whereas hire purchase agreements required largish deposits and full VAT to be paid in advance, leasing agreements often required just 3 payments in advance (often less than the percentage deposit on HP) and VAT on rentals.
- Accounting treatment: There were many mechanisms by which a leasing agreement could be dressed as an operating lease, thereby making it off balance-sheet lending.
- Perception: Hire purchase still carried the stigma of poverty and the 'tally man' whereas leasing was seen as a sophisticated business tool for shrewd business people.
Based on the above it is hardly surprising that leasing became popular; however the world has moved on and it is probably time that the world of finance did too.
Continuous changes in taxation have eroded the difference between lease & purchase options - you cannot get a true tax computation without taking into account the individual's (businesses) tax situation, the timing of the purchase, and the life of the assets - however, as a generalisation most long-life assets will be more beneficial on hire purchase or asset loan agreements.
Deposit criteria have relaxed (an HP agreement often has rentals in advance rather than percentage deposit stipulations), plus it is often possible to defer VAT, or even obtain a 100% asset loan.
Less than 10% of agreements now signed are qualifying operating leases (car finance excepted) so must be treated the same as HP for accounting purposes
Perception? Well are you really bothered about HP and asset loans?
Leasing might be the answer - but don't take it for granted! We don't give tax advice, but we are happy to talk it through!
