Buying more equipment
Even if it's only a mobile phone, a laptop or a bag of tools, all businesses need equipment. Regardless of your spending requirements, you should always look carefully at the purchase options.
Introduction
When deciding if you need to kit out an office with computers, phones, fax machines, photocopiers and network equipment, you either buy what you need upfront or lease it from a finance company. It's important to weigh up the pros and cons of each option and decide what's best for you
In brief
Capital allowances
"Under the capital allowance system, any spending on equipment can be offset against tax"
In the early days of a business, you may be able to get away with spending very little on new equipment. Most people have computers, mobile phones and cars, and these can easily be co-opted for business use.
That's fine up to a point. However, there will come a time when you'll need to buy a new laptop or even kit out an entire office.
At this point the first rule is to keep business spending separate from personal spending. Under the capital allowance system, any spending on equipment can be offset against tax. If the sum spent in any given year is less than £50,000 you can claim 100% back in that year. For instance, if you spend £20,000 on office hardware, that entire sum can be set against income in order to reduce your tax liability.
Lease or buy?
"The big question is whether or not to pay the money up front or enter into some kind of leasing or hire purchase deal"
Let's assume that the £20,000 you're about to spend on office equipment is solely for the use of the business. The big question is whether or not to pay the money up front or enter into some kind of leasing or hire purchase deal.
Buying outright has some advantages:
- You own the assets
- In certain cases they can be used as collateral for bank finance
- There are no further monthly payments
- You can claim capital allowances under the tax system
- The cost is generally lower than leasing or hire purchase because you are not paying an interest charge on top of the value of the goods
- You have no long-term commitments.
On the negative side, however, you have to remember that the value of your assets will fall as soon as you buy them. The equipment that cost £20,000 today will be worth considerably less over time. You also need to factor in the maintenance costs of equipment.
In addition, you will have to find money upfront. That's fine if you have it, but depending on your circumstances, it may make more sense to hang on to that £20,000 and make monthly payments financed by your revenues as they start to come in.
Leasing deals
"Leasing comes in several forms"
If you'd prefer to spread the costs, there are several alternatives to consider:
- Bank loan You could fund the purchase through a conventional loan from the bank. You pay interest - pushing up the overall cost of the equipment - but you will own the equipment while also spreading the cost. And you can claim a capital allowance because you're buying outright.
- Hire Purchase Under this kind of agreement, you buy the asset over a fixed period of time. In other words, you ultimately own the equipment but spread the cost over an agreed timescale. You can claim a capital allowance as soon as the agreement goes live
- Leasing The idea behind a typical leasing agreement is that you never actually own the equipment, although you can agree to buy it at the end of the leasing term. The annual cost of leasing is a tax-deductible business expense.
Leasing comes in several forms:
Contract Hire Agreement
Cars are often bought under a contract hire agreement in which the company pays a deposit and makes monthly payments over a one- to three-year period covering just part of the value of the equipment. At the end of that term the cars go back to the finance company and are sold on. This is often a revolving agreement, with the business then taking delivery of a new generation of company cars.
Operating Lease Agreement
Under operating lease agreement arrangements, you take equipment for a fixed period with the leasing company taking charge of maintenance. This type of deal is often used to acquire IT equipment or plant and machinery, which the company would otherwise find difficult to maintain. When the leasing deal finishes, the equipment returns to the leasing company, leaving the company free to upgrade to something more modern.
Long-term Finance Leasing
A third variation is long-term finance leasing, in which equipment is leased over the entire (expected) lifespan of the equipment.
Before making any decisions, you need to think carefully about the total cost of ownership. For instance, if you're buying outright you should also consider maintenance costs and depreciation. If you're considering leasing or hire purchase, think about how repayment costs, maintenance charges and tax reliefs may stack up for your business. Equally, you should consider the length of any agreement and how much it will cost to exit from it early, if your business circumstances change.
Lease-back
If you already own equipment but need to raise cash, one solution is lease-back.
Effectively this means you sell the equipment to a finance company in order to raise cash, and then immediately lease it back.
This is a way of freeing up money previously tied up in physical assets such as plant and machinery.
You receive upfront cash and the finance company makes its money by charging a monthly rental based on the value of the equipment plus interest.
If you need finance, but can't get a sufficiently large bank loan or find an investor, this can be a good way forward.
You can find out more about hire purchase and leasing from your bank, accountant or the Finance and Leasing Association (FLA)