UK SMEs are seriously affected by extremely low rates of Annual Investment Allowance and Capital Allowance, and there is no expectation for the government to rectify this. Due to the continuous effects of inflation relatively decreasing these fixed allowances year on year, and the low rates themselves, it is no surprise that more and more SMEs are opting to lease their computer hardware and software. In this article we explain the tax benefits of leasing computer hardware and software.
Advantages of leasing
Leasing offers a number of advantages, chief of which is companies can conserve cashflow by not having to pay a large sum of money upfront. However, it also removes the risk of getting caught with obsolete equipment which frequently needs updating, and provides a firm with a huge amount of flexibility in the software and hardware required as the business grows, develops and changes.
For SMEs, however, one of the most important and frequently cited reasons for leasing equipment is the huge tax benefits it brings.
Most people don’t realise that all lease payments are counted as rental payments in a firm’s accounts, and therefore are completely allowable against pre-tax profits. This is unlike all other means of acquisition such as cash purchases, for which only 18% of the cost can be offset against tax in the first year. Ultimately, this means that the total cost of leasing can be offset throughout the entire lease period, and all payments can be deducted as normal trading expenses.
The table below shows just how efficient and effective leasing is in comparison to an initial cash purchase of £10,000:
Cash Purchase Computer Lease Plan
Cost: £10,000 – paid Day 1 Year 1 Rentals: £1045 per quarter (Payable over 12 qtrs)
Year 1: £10,000 x 18% = £1,800 Year 1: 4 qtrs x £1020 = £4,080
Year 2: £6,000 x 18% = £1,080 Year 2: 4 qtrs x £1020 = £4,080
Year 3: £4,500 x 18% = £810 Year 3: 4 qtrs x £1020 = £4,080
Tax Allowable Expenditure After 3 years = £3,690 Tax Allowable Expenditure After 3 years = £12,240
Therefore, in the example above, leasing all the hardware and software provides a tax advantage of £8,550 – a significant amount of money. The tax benefits of leasing can be realised for all types of hardware and software, and have the additional benefits of allowing the firm to receive an even spread of tax relief rather than the peaks and troughs that may result from cash purchases. The consistency of relief from leasing means that the firm is able to plan and manage their accounts far more easily.
There are a huge number of benefits gained by leasing computer hardware and software, and the additional tax advantages are the most prominent of these for SMEs, which explains the growing number of firms choosing to make the most of these rewards.
Tax benefits of leasing computer hardware and software – where to find out more
If you’d like to discuss leasing computer hardware and software for your business, please get in touch today.
Read our section on technology finance here.
