Tax Benefits
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
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.