Buy or lease to equip your business?
Should you buy or lease the major items of equipment and vehicles you will need for your business? Both have advantages and disadvantages. This year’s reform of capital allowances, which give tax relief for equipment purchases, may affect your decision.
From April 2008, you can claim immediate tax relief on up to £50,000 a year that your business spends on buying any type of plant and machinery, including many fixtures in buildings and vans, though not motor cars.
The £50,000 annual investment allowance (AIA) is proportionately reduced if your accounting period started before April 2008. For example, a company with an accounting year starting on 1 January can claim the AIA on up to £37,500 in 2008 (9/12 x £50,000). Purchases in the two years before April 2008 qualify for the old first-year allowances of 50% for a small business and 40% if your business is medium-sized.
The AIA favours the purchase of equipment. However, if you spend more than the AIA, the excess will only qualify for writing down allowances at 20%, instead of 25% before April 2008. A hybrid rate of writing down allowance will be applied for accounting periods straddling 1 April 2008. 20% is also the current rate for most cars. Tax relief for purchases will therefore take longer. For example, at 25% a year, 76% of the cost of an asset is relieved after five years; at 20%, only 67% is relieved.
If you lease, you cannot normally claim capital allowances unless the agreement is effectively a hire purchase contract. But the lease rentals are an allowable expense, though relief is restricted on leasing payments for a car costing more than £12,000.
Of course, tax is not the only consideration. If you buy outright, you will usually pay less overall than on a leasing agreement, but you might have to borrow the money to make the purchase, which could be costly. Leasing could tie you into long-term agreements that might be difficult to terminate, but buying could leave you with equipment that you might not need in the future.
There are pros and cons to both. If you are planning to buy or lease major equipment, please come and talk to us, and let us help you understand the costs.