The tax relief available when acquiring business assets depends on whether you buy them outright, or on the type and length of the lease. This also affects whether VAT will be charged upfront or periodically.
The cost of renting or leasing an asset is deductible as a business expense so this can reduce your overall tax bill.
If you expect to own the asset at the end of the lease or hire purchase period, this is a supply of goods for VAT purposes. So you will have to pay VAT on the whole value at the start of the contract. If you are VAT-registered and want to reclaim VAT and sell the asset, you may have to account for VAT on your selling price. You may also have to account for VAT on the value of the asset if you give it away for free.
If you will not become the owner of the asset at the end of the lease or hire purchase contract, this is a supply of services for VAT purposes. So VAT will be payable periodically.
Note that if the leased asset is a vehicle, the right to recover VAT is restricted in some circumstances. HM Revenue & Customs (HMRC) provide guidance on reclaiming VAT on leased and purchased cars.
When you buy plant, machinery and IT equipment, you can deduct a proportion of the cost from your taxable profits each year - known as capital allowances.
You can claim capital allowances if the equipment is:
- bought outright
- bought through hire purchase
- supplied under a long funding lease - HMRC provide a definition of long funding leases.
You can't claim capital allowances with shorter leases - ie less than five years and sometimes less than seven - but the leasing company can, so you should benefit indirectly through lower rental charges. Also, because it's a trading expense, you can usually deduct the full rental costs from your taxable income.
For more information, see calculating tax relief when acquiring an asset.
Remember, businesses only pay tax if they are making profits. If your business is making a loss, minimising the impact of buying a new asset is likely to be more important to you than borrowing money tax efficiently - in which case, leasing might be a more suitable option.
For guidance on acquiring assets and the pros and cons of buying or renting, see decide whether to lease or buy assets.