Should you buy or lease the major items of
equipment and vehicles you will need for
your business? Both have advantages and
disadvantages. This year’s reform of capital
allowances, which give tax relief for equipment
purchases, may affect your decision.
From April 2008, you can claim immediate
tax relief on up to £50,000 a year that your
business spends on buying any type of plant
and machinery, including many fixtures in
buildings and vans, though not motor cars.
The £50,000 annual investment allowance (AIA)
is proportionately reduced if your accounting period started before April
2008. For example, a company with an accounting year starting on 1 January
can claim the AIA on up to £37,500 in 2008 (9/12 x £50,000). Purchases in the
two years before April 2008 qualify for the old first-year allowances of 50% for
a small business and 40% if your business is medium-sized.
The AIA favours the purchase of equipment. However, if you spend more
than the AIA, the excess will only qualify for writing down allowances at
20%, instead of 25% before April 2008. A hybrid rate of writing down
allowance will be applied for accounting periods straddling 1 April 2008.
20% is also the current rate for most cars. Tax relief for purchases will
therefore take longer. For example, at 25% a year, 76% of the cost of an
asset is relieved after five years; at 20%, only 67% is relieved.
If you lease, you cannot normally claim capital allowances unless
the agreement is effectively a hire purchase contract. But the lease
rentals are an allowable expense, though relief is restricted on leasing
payments for a car costing more than £12,000.
Of course, tax is not the only consideration. If you buy outright, you
will usually pay less overall than on a leasing agreement, but you might
have to borrow the money to make the purchase, which could be
costly. Leasing could tie you into long term agreements that might be
difficult to terminate, but buying could leave you with equipment that
you might not need in the future.
There are pros and cons to both. If you are planning to buy or lease
major equipment, please come and talk to us, and let us help you
understand the costs.
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