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Lease Rental versus Outright Purchase - A Worked Example

Guest post by: Al Shea

Article Overview: A simple yet useful worked example demonstrating the typical UK tax relief available via taking the leasing route to acquire new equipment for your business, compared to the UK tax relief available on outright purchase. This demonstration is based on the tax percentages currently in place in the United Kingdom.

Lease Rental versus Outright Purchase - A Worked Example

Quick Benefits:

• Tax relief - Rentals are 100% allowable against taxable profits (see example below)

• Option to take ownership of / title of proposed products

• Preserve other credit facilities

• No capital expenditure - rentals payable monthly

• Fixed Term (allows effective budgeting)

• Fixed payments

• Ability to add / upgrade products

Leasing vs Outright Purchase - Worked Example

Lease finance is the most effective way to acquire any new equipment as a result of the tax allowances that apply with this type of acquisition. Below is an illustration based on a 3 year lease agreement showing that, once tax relief is taken into account, the total amount paid can be less than buying the equipment outright:

Invoice Value: £10,000

Monthly Rental: £336.00

Total cost of Rentals: £12,096

Tax relief at 20% of Total cost: £2,419.20

Total cost after tax relief: £9,676.80

Lease Rental

Yr 1 - £4,032 (100% of rentals)

Yr 2 - £4,032 (100% of rentals)

Yr 3 - £4,032 (100% of rentals)

_________

Tax Relief Via Leasing: £2,419.20

Outright Purchase

Yr 1 - £4,000 40% of purchase price

Yr 2 - £1,500 25% of reduced value

Yr 3 - £1,125 25% of reduced value

________

Tax Relief Via Purchase: £1,325.00

********** - PLEASE NOTE THE CHANGES TO TAX ALLOWANCES INTRODUCED IN 2010 - ***********

SEE OUR NEW ARTICLE 'LEASING EQUIPMENT VS OUTRIGHT PURCHASE 2010 EXAMPLE' FOR UPDATED DETAILS

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Article Tags: demonstration, leasing, outright purchase, tax relief, united kingdom



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