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Tax Implications of Leasing vs. Buying Business Assets in the UK

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Leasing vs Buying Business Assets: Jack Ross Explains Tax

Introduction: The Complex World of Asset Acquisition

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When acquiring assets for your business, whether machinery or a van, the decision to lease or buy is not to be taken lightly. Both options have tax implications, and what suits one business may not suit another. This article explains tax relief, VAT, and other financial factors you need to consider when deciding between leasing assets and buying them outright.

Leasing vs. Buying: The Basics

Leasing an asset means renting it for a specific term while buying it outright means you gain full ownership. When you lease, you make monthly payments to a leasing company, and at the end of the lease, you may have the option to buy the asset. On the other hand, when you buy an asset, you can claim capital allowances against your corporation tax bill.

Tax Implications of Leasing Assets

VAT and Leasing

When you lease an asset, you will usually pay VAT on the monthly lease payments. If your business is VAT-registered, you can often reclaim this VAT. However, there are conditions. For example, if a van is used solely for business purposes, you can reclaim 100% of the VAT paid. But if there is any personal use, the portion of the VAT reclaimable could be reduced.

Rental Payments and Corporation Tax

The amount of the rental payments made under a lease agreement is often fully deductible from your profits, reducing your corporation tax. This is different from when you buy an asset outright, where you claim capital allowances instead.

Benefit-in-Kind (BIK)

If the leased asset, such as a company car, is also used for personal use, a Benefit-in-Kind tax may apply. This is calculated based on the CO2 emissions of the vehicle and can affect both the employer and the employee.

Financial Planning and Accountant’s Role

Cash Flow Considerations

Leasing generally has less impact on your cash flow since you are not paying the asset’s cost upfront. When you buy, you will incur the full cost, which may affect your business’s liquidity.

Consult An Accountant

An experienced chartered accountant can provide detailed advice tailored to your business needs. They can help you consider various factors, like the asset’s depreciation, tax rate, and whether you buy or lease, to make the most financially sound decision.

Jack Ross Chartered Accountants has a wealth of experience dealing with various complex tax issues. Use the contact form on the right, and one of our experts will be in touch.

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Maintenance and Costs: Leasing vs. Buying

Leasing and Maintenance

When you lease an asset, maintenance is often included as part of the lease agreement. This can significantly reduce incidental costs for your business. However, you will need to be clear about what the leasing company covers and what falls under your responsibility.

Ownership Costs

When you own an asset, all maintenance and running costs are your responsibility. While you will have full ownership of the asset, you will also incur all the associated costs, something to consider when assessing your business’s cash flow.

End-of-Term Options: What Happens When the Lease Ends?

Returning, Renewing, or Buying

At the end of the lease, you typically have several options: return the asset, renew the lease, or buy the asset outright. Each option has its own set of tax implications. For instance, if you choose to buy the asset at the end of the lease, you may be able to claim capital allowances on it, provided it is used for business purposes.

When You No Longer Need the Asset

Should your business needs change, leasing provides flexibility. When the lease term ends, you can simply return the asset, thereby avoiding the costs and hassles of selling it.

Emissions and Environmental Considerations

Emission Standards and Tax Benefits

Some leased vehicles may offer tax benefits based on their CO2 emissions. Lower-emission vehicles often have lower Benefit-in-Kind rates, which can be a deciding factor when choosing to lease a company car.

Final Thoughts: Whichever Path You Choose

Seek Professional Advice

The tax implications of leasing vs. buying are complex and varied. Consulting your accountant can help you navigate the myriad of options and regulations. They can also help you determine the most tax-efficient way to acquire assets, whether through leasing, buying, or even opting for a hire purchase agreement.

Jack Ross Chartered Accountants has decades of experience dealing with complex financial matters. Use the contact form below and one of our tax specialists will be in touch.

The main difference is that when you purchase an asset, such as a vehicle, its cost becomes a taxable business expense. When it comes to leasing a company vehicle, you will be able to claim back the VAT on the lease payments if your limited company is registered for VAT. Depending on the term of the lease and the cost of it, you may be able to claim 100% tax relief in certain cases.

Yes, if the asset is used for your business then these payments can be deducted from your taxable income. It is important to note that HMRC have different rules for each type of asset and so it is recommended to look into this before claiming any deductions.

Yes, whether you choose to buy or lease a company car depends on what suits your circumstances best. Generally speaking, even if you are not VAT-registered and choose to buy outright instead of hire purchase option or lease agreement, you will not be able to reclaim any VAT incurred. However, if your business is registered for VAT then all rental costs pertaining to that company car can be claimed back as input tax under certain conditions.

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