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What’s the difference between buying, Hire Purchase, or leasing business-asset


We are often asked what the differences are between buying outright, hire purchase and leasing business assets. So here is a summary of how they work for tax, VAT and what’s shown in the accounts for each method.

The choices will depend on what finance is available, but each method has different treatments for tax, VAT and accounting purposes.

Buy – Outright purchase with cash or a bank loan

How it works for tax
The depreciation charge is not allowable for tax relief but you can claim capital allowances.
100% tax relief may be available up to a maximum of £200,000. This does not apply to cars and the excess over £200,000 gets a lower rate of writing down allowance
Qualifying energy saving or environmentally beneficial equipment gets a 100% tax deduction.Loan interest used for the purchase is tax deductible.

How it works for VAT
If the purchaser is VAT registered, the VAT is claimed back on the VAT shown on the suppliers invoice.VAT can’t normally be claimed on cars.

What the accounts show
The cost of the asset goes on the balance sheet usually as a fixed asset and it is depreciated.


Hire Purchase – The asset usually includes an option to purchase at the end of the term

How it works for tax
This is the same as for an outright purchase.The finance charge is normally an allowable tax deduction.

How it works for VAT
VAT is normally payable with the first installment and claimed back in the normal way.
VAT can’t normally be claimed on cars.

What the accounts show
The asset on HP is shown as if it was purchased i.e. the cost of the asset goes on the balance sheet and it is depreciated.
The hire purchase amount due is shown as a liability on the balance sheet, which is reduced by the HP payments (excluding the interest element).


Operating Leases  – The asset isn’t owned but rented and returned to the owner at the end of the rental period e.g. contract hire

How it works for tax
The tax relief is given for the rental paid, except where the asset is a car with a Co2 emission exceeding 130g/km, where there is a 15% reduction in the tax claimable amount.

How it works for VAT
VAT is charged on each rental. Most businesses will be able to claim back 50% of the VAT on a car.  This restriction does not apply to maintenance charges shown separately on car contract hire.

What the accounts show
The rentals appear on the profit and loss account as an expense.


Finance Lease

How it works for tax
For short term leases tax relief is normally  given for the finance lease payments,  with a 15% disallowance  for cars with Co2 emissions exceeding 130g/km
For long term leases tax relief is given in line with the accounting treatment  and capital allowances claimed.

How it works for VAT
VAT is charged on each rental. Most businesses will be able to claim back 50% of the VAT on a car.

What the accounts show
For short leases (up to 7 years) the rental payments are shown as an expense on the profit and loss account.For longer term leases the asset is shown on the balance sheet and depreciated. 
There is  also a liability shown for the future rental payments.

Please contact us if you want more advice on this topic.

CLOUD ACCOUNTING LLP

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