Decide whether to lease or buy assets

The tax implications of buying and leasing equipment

Capital allowances allow you to offset the cost of capital assets against the taxable profits of your business.

Capital allowances are used instead of normal accounting depreciation, which you cannot offset against tax. They are defined and set by the government and they are often used as a way of encouraging certain types of investment.

You can claim your own capital allowances by using hire purchase or buying assets outright. With hire purchase agreements, your business is treated as the owner of the equipment and so you can claim capital allowances, offsetting the asset against your tax bill. You can also claim capital allowances if the lease is a long-funding lease (finance leases of more than seven years and in some cases more than five years; and some long-operating leases).

If your business reaches a low profit or loss, claiming the full capital allowances may not be worthwhile. With shorter leases - less than five years and sometimes less than seven - the leasing company will claim the capital allowances against its own profits and should pass on the savings to you in reduced rental charges. Businesses can usually deduct the full cost of lease rentals from taxable income as a trading expense where the lease is not a long-funding lease.

Use our interactive tool to find out what capital and incentive allowances your business could claim.

Subjects covered in this guide

• Introduction
• How to finance assets
• Types of leasing
• The pros and cons of buying equipment outright
• The pros and cons of leasing or renting business equipment
• The tax implications of buying and leasing equipment
• Buying assets: understand depreciation
• Choose a finance company

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