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.
