We are asked by customers if leasing is really tax deductible… but there’s a bigger story.
Leasing converts large capital expenditure into small monthly payments, leaving your cash reserves in place for immediate expenses, but does this mean that it’s tax deductible?
The quick answer is YES! Each payment is 100% allowable against tax.
But there is a background story … generally, businesses prefer leasing because buying outright is considered Capex (Capital Expenditure), which means that not all of the amount paid upfront can be deducted. Whereas, the amount paid to a leasing company is Opex (Operational Expenditure) because it’s incurred as part of the daily business operations, and therefore the business can deduct the cash that it spent within a tax year.
Tax relief is available whether you buy outright, lease, or buy on hire purchase, it’s when that take relief is given that makes a difference to businesses. When you lease computers, the tax relief is spread evenly throughout the lease term, whereas with an outright purchase the tax relief is given upfront but none over the following years.
Is your Lease an Operating or Finance Lease?
We have worked with our own accountants and determined that when you consider the terms of “Financial Reporting Standard 102” our leasing solutions are deemed to be either an Operating Lease or a Finance Lease. The table below offers some definitions to help you.
|Finance Lease||Operating Lease|
|Ownership of the equipment is transferred to lessee at the end of term automatically||Yes||No|
|There is option/right to purchase for a low value (lower than the fair value) at end of term||Yes||No|
|The lease covers most of the economic life of the equipment even if title is not transferred||Yes||No|
|The present value of the minimum lease payments amounts to at least substantially all the fair value of the equipment. (was 90% of value test now no set %) Need present value calculation to answer this.||Yes||No|
|Is the equipment so specialised that it can only be used by the lessee||Yes||No|
|If cancellation is allowed the losses are borne by the lessee||Yes||No|
|Gains or losses from fluctuation in the residual value of the equipment accrue to the lessee||Yes||No|
|Lessee can continue the lease for a pepper corn rent in the secondary rental period||Yes||No|
But even then it also depends on whether your business is part of a group and whether that group has already claimed it’s
Your accountant is likely to ask you about any lease contracts you have in place. If you are an existing HardSoft customer, we can provide you with the information you’ll need to allow your accountant to decide how they should account for your lease payments.
Please note that whilst we are happy to assist your accountant and provide you with clarifications on our different leasing solutions, HardSoft is not a tax advisor and you should always seek professional advice from an accredited professional.