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: 

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: 

Disadvantages of operating leases include: 

Finance leases 

Advantages of finance leases include: 

Disadvantages of finance leases include: 

Outright purchase  

Advantages of outright purchase include: 

Disadvantages of outright purchase include: 

Need help choosing the right option?

Contact TaxAssist Accountants for a free, no-obligation consultation.

0800 0523 555

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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: 

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 0800 0523 555 or contact us to learn more about our services and to book a free initial meeting.  

 

Last updated: 1st November 2024