Leasing Tax Breaks
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.