Should you buy or lease your equipment or car?
This is a common question from clients when faced with replacing assets, and not an easy one to answer as it is dependant on so many different needs, so lets take a simplistic look at the two options and their advantages and disadvantages.
Outright purchase
If you are going to use the asset for longer-term then outright purchase has certainly got its advantages. Once you have bought and paid for it then it is yours, whereas if you where to lease, you could end up paying for an asset time and again.
Also with assets bought you are able to claim what is know as ‘Capital Allowances’, this is an amount that is allowed against your profits thus resulting in reducing your tax bill.
So for example, in the tax year to 31 March/5 April 2008 you will get an allowance as follows:
Motor Car 25% of the cost, but restricted to a maximum of £3,000 per car (this restriction is to stop you buying a Bentley and getting a very large tax deduction for doing so).
Other assets such as office equipment for a small business would have an an initial allowance of 50% on any new asset bought in the tax year and 25% (on a reducing balance basis) on any assets bought previously.
I will not go into this any further, but as you can see buying an asset whether outright or on a loan has the added advantage that you can, if you are a small business, get a large proportion of its cost offset against your profits, which results in lower tax bills, which in turn helps fund the asset.
Another advantage, if the asset has VAT on it and you are VAT registered, then you are able to reclaim this VAT, which again reduces any VAT payment you have to make in a particular period, all of which can help with cashflow.
Lease
If you only need the asset for a shorter period then leasing is very advantageous.
With leasing you will not have to worry about the reduction in value of the asset when you come to sell, because you never own it, and as it may be worth a lot less than you would have paid if you had bought it outright, this is a great benefit.
Leasing can also be attractive if you haven’t got the funds to buy outright, or if you need your money for something else which takes priority.
For example, if you are looking to open a hot/cold sandwich bar, you need fridges, freezers, cooking equipment etc all of which cost money, but you also need to pay the rent, electric, staff wages, accountant/business adviser, advertising costs etc, and unless you are minted something has to give, so you lease all the equipment which allows you to open and you can then pay the lease/rental payments monthly from what you earn in the shop.
Although the above are not intended as definitive answers to every situation, I hope they give you an idea of how to think when faced with, should I buy or lease?, then when you phone your accountant/business adviser you know enough to question how and why he came to his conclusion when advising you.
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