Lease v Buy Example

4th October 2010

Company A is looking to purchase new Apple Mac equipment for its business. The supplier had offered them two options, either to buy the equipment outright or to utilize a lease option via HardSoft ………….
ASSUMPTIONS

Equipment Price £7,000.00
Lease Period (yrs) 3
Frequency Monthly
Company’s Tax Rate 28%

CASH PURCHASE  Tax relief is only available on the capital allowances on the equipment. (Rate for 2010/2011)

Year Capital Allowance Tax Relief
1 20% of £7,000                =                 £1,400 Less 28%                     =                            £392
2 20% of £5,600                =                 £1,120 Less 28%                     =                            £314
3 20% of £4,480                =                 £896 Les 28%                         =                          £251
Total Tax Relief £956

LEASE RENTAL  Tax relief is available on all rentals in this case at a rate of 28% (The current Corporation Tax Full rate)

Year Capital Allowance Tax Relief
1 12 Rentals of £242        =                 £2,904 Less 28%                     =                            £813
2 12 Rentals of £242        =                 £2,904 Less 28%                     =                            £813
3 12 Rentals of £242        =                 £2,904 Les 28%                         =                          £813
Total Tax Relief £2,439

EQUATES TO

Cash Purchase

Lease Rental
Total Tax Relief

£956.00

£2,439.00

By choosing to lease, Company A would gain £1,483 in tax relief when compared with a cash purchase. This excludes discounted value of future money that is affected by inflation, interest rate/overdraft cost savings of deferring capital expenditure and investment opportunities of having available capital.
Tax Relief is only on profits but, Tax Relief values for any one year within a three year lease agreement can be deferred to subsequent years.