What are the most cost-effective ways to purchase equipment for your business?

Businesses need access to a range of equipment to operate efficiently and ensure growth. Examples include computers, specialist machinery and communication systems. 

Equipment can often be costly though, so your business might not have the cash flow to be able to buy it outright and need to lease items instead.  

This guide provides advice on how to purchase equipment for your business, with tips on how to choose between leasing and buying as well as understanding business equipment tax relief and the financial and tax implications. 

Examples of business equipment you might lease or buy 

Common types of equipment businesses can lease or buy include: 

• Laptops and computer equipment 
• Coffee machines for office or retail environments 
• Point of sale (POS) terminals 
• Industrial and engineering machinery 
• Audio and video equipment 
• Printers and multifunction devices 
• Telephone and other communication systems 

This article covers the purchase of equipment above, but not the purchase of vehicles such as cars and delivery vans. As there is more to cover when considering these articles, we will cover this elsewhere. 

To decide whether you should lease or buy the equipment, consider factors including the long-term benefits of owning the asset, the impact on your cash flow and the tax advantages. Cash flow management for business is crucial in running a successful business. 

Understanding the different ways to purchase equipment 

There are several ways you can purchase equipment, including:  

Finance lease 

A finance lease is a long-term agreement that allows a business (the ‘lessee’) to use an expensive item they might not otherwise be able to afford, in return for monthly payments with interest. The lessee may have the option to buy the equipment from the original owner (the ‘lessor’) at the end of the lease.  

Operating lease 

An operating lease is a short-term agreement to use an item, usually no longer than 12 months, and covers less than the asset’s total useful life. At the end of the lease, the equipment is returned to the ‘lessor’ without the option for the business to buy it.  

Outright purchase 

This involves purchasing equipment by paying the full price upfront which results in complete ownership of it from day one. 

Short-term vs long-term considerations 

When requiring equipment to operate your business successfully, there are various short- and long-term considerations that you should consider when deciding which purchasing option to choose.  

In the short term, equipment leasing can provide more flexibility and lower upfront costs. This is useful for businesses in their early stages or those with rapidly changing technology needs. 

In the long term, buying equipment outright can save you money over time, which is helpful especially for businesses that want full control over their assets or have stable cash flow. 

Pros and cons: Leasing vs buying equipment 

There are various benefits and drawbacks for leasing and buying. 

Operating leases 

Advantages of operating leases include: 

• useful for businesses wanting short term access to the latest equipment without the responsibility for maintaining it. 
• a short-term lease means you can more easily replace outdated equipment. 
• usually involves lower initial costs than buying equipment.  
• payments are tax deductible as an operating expense.

Disadvantages of operating leases include: 

• you have limited options in terms of how you can modify or customise the equipment. 
• the lessor might place restrictions on usage of the equipment. 
• you have to take out another lease if you want to upgrade the equipment 
• you might face higher costs over time compared to purchasing the item outright.  

Finance leases 

Advantages of finance leases include: 

• you have full control over the asset, which is useful for long term usage without restrictions. 
• you usually have the option to buy the equipment at the end of the agreement. 
• lower upfront costs than purchasing outright. 

Disadvantages of finance leases include: 

• you are responsible for maintenance, repairs, insurance and other costs which can impact your business’ cash flow. 
• you might end up paying more for the equipment over time than you would if you bought it outright. 

Outright purchase  

Advantages of outright purchase include: 

• your business has full ownership of the equipment so you can make modifications, resell etc. All repair and maintenance costs are tax-deductible from business profits. 
• there are no ongoing payments or interest which is useful for long term cash flow planning.  
• your business can claim capital allowances for the equipment. the purchased asset appears on your balance sheet which can increase company value.  

Disadvantages of outright purchase include: 

• higher upfront costs can put pressure on your business’ cash flow. 
• some assets can depreciate and devalue quickly. 
• Your business is fully responsible for all costs of the equipment, including maintenance and repairs, which can lead to substantial expenses over time.   

Tax treatment and accounting implications for UK businesses 

The tax implications for purchasing methods are as follows: 

Finance lease 

When accounting for a finance lease, the lease payments are generally treated as loan repayments. This involves separating the capital repayment and interest payments when accounting. 

The interest you pay on the lease repayments can be deducted from your business income, reducing your profits. The leased asset will be shown on your business’ balance sheet as an asset, with a corresponding liability showing the ‘loan’. You typically cannot claim capital allowances on the asset.  

If your business is VAT registered, it can reclaim VAT on finance lease payments.  

Operating lease 

When it comes to accounting for an operating lease, generally the payments under an operating release are treated as the hire of an asset. As such, the lease payments are deductible as operating expenses in your business’ accounts for tax relief purposes.  

Outright purchase 

The purchase cost is not tax-deductible, instead the asset is shown on your business’ balance sheet, and the business can claim capital allowances on the equipment. This means deducting some or all of the value of items, classed as ‘plant and machinery', when calculating your taxable profits. 

Businesses can currently claim the following capital allowances: 

• Full expensing: 100% first-year relief on qualifying new main rate plant and machinery investments from 1 April 2023 until 31 March 2026 
• 50% first-year allowance (FYA) for expenditure on new special rate (including long life) assets until 31 March 2026 
• Annual Investment Allowance (AIA): 100% first-year relief for plant and machinery investments up to £1m. 
• Writing down allowance (WDA): depending on which ‘pool’ the asset sits in, 18% or 6% tax relief over the life of the asset until the value of the asset has been claimed. 

To ensure you’re using the most tax-efficient equipment purchase option for your business, speak to your accountant. 

Choosing the right approach for your business 

Selecting the most suitable equipment purchasing option for you depends on your business’s specific financial situation, needs, and long-term goals.  

You need to ensure your decision doesn’t place too much pressure on your cash flow, and you understand the full financial and tax implications of the type of purchase you choose.  

Speak to an expert accountant for advice tailored to your individual circumstances. 

Need help with how to purchase equipment for your business? 

For help with choosing the right equipment financing option for your business, speak to TaxAssist Accountants. Call our experts on 0161 998 8444 or contact us to learn more about our services and to book a free initial meeting.  

 

Date published 1 Nov 2024 | Last updated 1 Nov 2024

This article is intended to inform rather than advise and is based on legislation and practice at the time. Taxpayer’s circumstances do vary and if you feel that the information provided is beneficial it is important that you contact us before implementation. If you take, or do not take action as a result of reading this article, before receiving our written endorsement, we will accept no responsibility for any financial loss incurred.

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