Leasing an asset
29th October 2019 by Jonathan Wingfield
An operating lease is typically used when short-term asset rental is required, for example for a few months. For this type of agreement, tax relief is given as you pay for the use of the asset.
For longer term leasing there are two alternatives.
- Hire purchase which, for tax treats the asset considered as purchased when it is brought into use, meaning AIA may be claimed to obtain full tax relief in year 1; and
- Finance leasing.
A finance lease is a bit different from hire purchase in that you sign a lease to allow you to use the asset and pay by instalments for the pleasure. Each lease payment will have VAT charged, which can be reclaimed in full provided the asset is used in a VAT-registered business and is not a car with private use.
In the accounts the asset is treated as purchased at the start, with the amount capitalised being the total of the lease payments less any interest element. The important difference is that the tax relief is given on the depreciation of the asset. This is very helpful if you have already used your AIA, as this gives tax relief more quickly than Writing Down Allowances (WDA), which only allow 18% relief per year. The way tax pools work means it can take 25 years to get almost full tax relief.
For example, let’s assume you take a finance lease agreement for eight years on a new machine that is costing a total of £200,000 and after the eight years the machine will be scrapped. If depreciated over 8 years on a straight-line basis, you will receive £25,000 tax relief per year. In a normal tax pool you would have received almost £41,000 less in tax relief over the 8 years, with most of the balance given over the next 17 years.
Finance leases are very useful for businesses wanting to make large investments into plant and machinery and obtain maximum tax relief as soon as possible.
For more information please contact Jonathan Wingfield.
« Back to blog