We often get asked about whether buying or leasing is the better option…the answer is never the same…it depends on the nature of your business and your personal circumstance.
If you have the funds available and the item is required to carry on your business then you will usually benefit from buying the item outright. If you do not have funds available then you are usually better off leasing which will see the cost spread through your future cashflow.
However, you should consider if the item will be used often enough to warrant buying one – would you actually be better off hiring one for the occasions when you will require its use. This would be better if the item was only required say a couple of times a year.
You also need to consider if you could use your money differently. Could you earn a better rate of return if you invested elsewhere in your business? Your business may be at the stage where having a few thousand pounds as additional working capital would actually see the rate of return improve far more significantly than if you purchased some equipment. You may have a new customer that would be great but they need longer credit terms – having that extra cash available to deal with this may help you grow your business and the funds may grow much more rapidly.
The impact buying equipment will have on net profit is always important – lets say the equipment you want costs £2,000, or the lease cost is £75 per month.
• Option 1 – purchase with cash – The net profit of the business will only be impacted by the depreciation charge of the asset. This is just an accounting adjustment to release the cost of an asset into the profit and loss account over the expected life of an asset. However, your taxable profit would reduce by the £2,000, assuming you had sufficient Annual Investment Allowance (AIA, £200,000 for 2017/18). The overall cost to the business would be £1,600, after tax relief, this would all be dealt with in the year of purchase.
• Option 2 – lease – The net profit would be reduced by the monthly rentals, say £900 per year. This would be a tax-deductible expense, therefore meaning that cost to the business would be £720 for each and subsequent years. After year two, assuming tax rates remain unchanged the cost to the business would be £1,440, and year 3 £2,160.
Depending on the expected life of the asset and whether the lease may include updates and or maintenance by the end of year 3 you may be better off by purchasing the item outright, although if you don’t have the funds available leasing may be the only option.
As above, each business is different and will need to consider both the cash and tax implications of purchasing vs. leasing. To further complicate matters you may be able to get a loan to purchase the asset which would potentially spread the cost of the item over a longer period, although you would gain the advantages of owning the asset.