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title, lease v buy

One misconception that leasing still suffers from is that it is not cost-effective, in addition to the benefits leasing brings it competes very well in simple monetary terms. Customers need to understand that leasing can indeed prove its case on cost-effectiveness grounds.

  
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Example:
Company A is looking to purchase new equipment for its business. The supplier has offered them two options, either to buy the equipment outright or to utilise a lease option.

Assumptions:

• Equipment Price: £7,374
• Lease Period: 3 Years
• Frequency: Monthly
• Company’s Tax Rate: 30%

Cash Purchase
Tax relief is only available on the capital allowances on the equipment.

Year Capital Allowance Tax Relief
1 25% of £7,374 = £1,843 Less 30% = £553.00
2 25% of £5,531 = £1,383 Less 30% = £415.00
3 25% of £4,148 = £1,037 Less 30% = £311.00
Total tax relief: £1,279.00

Lease Rental
Tax relief is available on all rentals, in this case at a rate of 30%.

Year Rentals Paid Tax Relief
1 12 rentals of £252.00 Less 30% = £908.00
2 12 rentals of £252.00 Less 30% = £908.00
3 12 rentals of £252.00 Less 30% = £908.00
Total tax relief: £2,724.00

Equates to:

  Cash Purchase Lease Rental
Total tax relief: £1,279.00 £2,724.00

By choosing to lease, Company A would gain over £1,400 more in tax relief when compared with a cash purchase.

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