Leasing Tax Breaks

The main reason companies lease high-value equipment is to spread the cost and to preserve capital. But there are also tax advantages to leasing equipment.

Under tax law, companies cannot offset capital expenditure against corporation tax directly. Instead, they have to claim capital allowances. However, the HM Revenue and Customs rules for writing down business assets do not always coincide with either a client’s own accounting policies, or cash flow.

From 1 April 2008 companies can claim tax relief (known as a writing down allowance) on 20% of the cost of a capital item. Each year, the company can claim a further 20% on the remaining expenditure. But in most cases, they will have paid for 100% of the cost of the equipment up front, with cash or through a loan.

A lease – assuming it is set up in the right way – allows companies to claim equipment ‘rentals’ as a general business expense, rather than as a capital item. In this way, the whole of the monthly or quarterly leasing cost can be set against profits for tax. This can offer a real tax advantage, especially when it comes to IT equipment, which is relatively expensive, but also has a relatively short life span.

Measures introduced in the 2007 Budget, however, have complicated matters. The Government replaced the old system of higher, first-year capital allowances with a new system, called the Annual Investment Allowance (AIA).

The AIA allows companies to claim the complete cost of capital expenditure in the first year, up to a limit of £50,000. For sums above that, businesses can claim the writing down allowances in the usual way.

For businesses that spend £50,000 or less on capital items, the AIA might make leasing less attractive. Provided the business has the money, it can claim 100% relief on IT investments without the worry of a long-term commitment to a lease. For companies that have other, longer-life assets, the AIA could be a way of dealing with shorter-life items such as laptops or desktop PCs, with leasing used to spread the cost of servers or data centre kit.