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What is a purchase order?
If you are in the process of purchasing new or used equipment for your business and considering leasing, you will want to understand the tax benefits for your business and if they apply to your purchase. We’ve put together this simple guide to explain what the tax benefits could be for your business.
Many companies both large and small, choose to lease rather than purchase equipment with their cash reserves. This is because lease rental is 100% tax deductible, and all payments made for the equipment are written off against the company’s tax bill. For any profit-making business, this means a substantial saving in the real cost of acquiring equipment by lease rental.
Payments on qualifying leases are written off as direct operating expenses, rather than a debt or outstanding liability, thus reducing short-term taxable income. All capital allowances are passed on to you, and lease payments can be offset against taxable profits. VAT can also be reclaimed on monthly payments. The status as a “lease” as opposed to a “liability” on a company’s balance sheet is something the banks often like to see, which is why a lease can be attractive. For this reason, leasing is often referred to as an ‘off balance sheet’ financing – a huge advantage to both large and small businesses.
When using a lease to acquire new business assets, the title of the goods remains with the Lender or Broker who has funded the lease. With no title ownership, the equipment would not show on the balance sheet; therefore, not needed to be shown to depreciate over a fixed period of time.
If Reality Finance arranges the funding for your new asset, we would be the “third party” mentioned within the lease agreement, as we purchase the equipment from the supplier and then sell it to your business. This means that you can use the equipment as your own and own it at the end of the leasing term.
Leasing converts a large capital expenditure into smaller monthly payments. Hence your company would have the profit-making equipment immediately and keep cash reserves for a rainy day. Rather than investing the precious cash reserves in depreciating assets, you can use them to help increaseprofits. The disadvantage to buying equipment outright is that the capital invested becomes a depreciating asset. This is an asset with decreasing value over time. The total amount that assets have depreciated during a reporting period is shown on the cash flow statement and also makes up part of the expenses shown on the income statement. The amount that assets have depreciated by the end date is shown on the balance sheet.
* 19% rate of tax for companies operating with less than £250,000 annual profit.
