The
fundamental characteristic of a lease is that the ownership never passes
to the business.
The finance house claims the capital allowances and passes the benefit to the business, by way of reduces rental charges.
The business can generally deduct the full cost of the lease rentals from taxable profits as a trading expense.
As with hire purchase the business will normally be responsible for the maintenance of the equipment.
Although the business does not own the equipment they have most of the "Risk & Rewards" associated with ownership. They are responsible for maintaining and insuring the asset on their balance sheet as a capital item.
When the lease period ends, the Leasing Company will usually agree to a secondary lease period at significantly reduced payments. Alternatively if the business wishes to stop using the equipment it may be sold second hand to an unrelated third party. The business arranges sale on behalf of the leasing company and obtains the majority of the sale proceeds.
Ownership of the goods at the end of the lease period - not classes as an asset - capital allowance is claimed by the lesser, i.e. the finance company - 100% Tax relief on the full payments is allowed by Inland Revenue - renewable rentals are available during and at the end of the primary term.
The finance house claims the capital allowances and passes the benefit to the business, by way of reduces rental charges.
The business can generally deduct the full cost of the lease rentals from taxable profits as a trading expense.
As with hire purchase the business will normally be responsible for the maintenance of the equipment.
Although the business does not own the equipment they have most of the "Risk & Rewards" associated with ownership. They are responsible for maintaining and insuring the asset on their balance sheet as a capital item.
When the lease period ends, the Leasing Company will usually agree to a secondary lease period at significantly reduced payments. Alternatively if the business wishes to stop using the equipment it may be sold second hand to an unrelated third party. The business arranges sale on behalf of the leasing company and obtains the majority of the sale proceeds.
Ownership of the goods at the end of the lease period - not classes as an asset - capital allowance is claimed by the lesser, i.e. the finance company - 100% Tax relief on the full payments is allowed by Inland Revenue - renewable rentals are available during and at the end of the primary term.
Lease
Hire Purchase
After all the payments have been made the business becomes the owner of the equipment either automatically or on the payment of an option to purchase fee. For tax purposes from the beginning of the agreement the business is treated as the owner of the equipment and so can claim capital allowances. The business will normally be responsible for the maintenance of the equipment.
Ownership of goods on day one - Looked upon as an asset on the balance sheet - capital allowance benefits are claimed by customer - only a 25% write down on a depreciating scale over repayment period is allowed by Inland Revenue - a proportion of the repayment interest can also be offset.
Operating Lease
The only difference between an Operating and a Finance Lease is that the primary period to rentals does not cover substantially all of the capital cost and hire charges. Due to the fact that the asset needs to be sold on at the end of the primary period to recover the residual value; it is very rare for an operating lease to have a secondary rental period.
After all the payments have been made the business becomes the owner of the equipment either automatically or on the payment of an option to purchase fee. For tax purposes from the beginning of the agreement the business is treated as the owner of the equipment and so can claim capital allowances. The business will normally be responsible for the maintenance of the equipment.
Ownership of goods on day one - Looked upon as an asset on the balance sheet - capital allowance benefits are claimed by customer - only a 25% write down on a depreciating scale over repayment period is allowed by Inland Revenue - a proportion of the repayment interest can also be offset.
Operating Lease
The only difference between an Operating and a Finance Lease is that the primary period to rentals does not cover substantially all of the capital cost and hire charges. Due to the fact that the asset needs to be sold on at the end of the primary period to recover the residual value; it is very rare for an operating lease to have a secondary rental period.
If the business needs a piece of equipment for a shorter time, then operating lease may be the answer. The leasing company will lease the equipment expecting to sell it second hand at the end of the lease, or to lease it again to someone else. It will therefore not need to recover the full cost of the equipment through the lease rentals.
This type of lease is common for equipment where there is a well-established second hand market, such as cars and construction equipment. The lease period in this case will be usually be for two to three years, although it may be much longer, but it is always less than the usual working life of the machine.
The business would not enter an operating lease asset on its balance sheet capital item.
End user does not retain ownership - a portion of the capital cost is deferred until the end of the lease period - a residual amount is determined at the outset of the lease agreement with supplier.
NB: This product is primarily used for public trust business, i.e. NHS and County Council, or for the purchase of vehicles.
Sale and Leaseback
In this case the owned assets are sold to the finance company that will then take full ownership of the assets. The assets are then leased back to the customer as a finance or operating lease. Thus if you require financing for an unsuitable asset or for project work i.e. "Turn Key" a Sale & Leaseback will enable you to put the equity of your existing assets to good use.
Fixed and Variable Rates
Asset Finance agreements can be based on Fixed or Variable Interest Rates.
A Fixed Rate Agreement has the total repayments or hire charges fixed at outset, and will not vary. This allows you to manage your cash flow more effectively.
In some cases the payments are fixed throughout the hire purchase or lease agreement, so a business will know at the beginning of the agreement what their repayments will be. This can be beneficial in times of low, stable or rising interest rates but may appear expensive if interest rates are falling. On some agreements such as those for a longer term the finance company may offer the option of variable rates of interest. In such cases rentals or instalments will vary with current interest rates; hence it may be more difficult to budget for the level of payment.
Security
Under both the hire purchase and leasing options, the finance company retains legal ownership of the equipment at least until the end of the agreement. This normally gives the finance company better security than lenders of other types of loan or overdraft facilities. The finance company may therefore be able to offer better terms.
The decision to provide finance to a small or medium sized business depends on that business's credit standing and potential. Because the finance company has security in the equipment, it could tip the balance in favour of a positive credit balance.