Your Guide to Tax Relief when Purchasing or Leasing an Asset

As a business, you can acquire tax relief when you have bought or leased equipment, otherwise referred to as assets. For instance, when you purchase or make an arrangement for the Hire Purchase or Lease of plant, equipment (including IT equipment), and machinery, then you can deduct a certain proportion of the total cost of purchase or lease from your company’s profits which are taxable for the year – this tax relief is also known as a capital allowance.

What is capital allowance and how can you benefit from it?

A capital allowance is generally a fixed part or proportion of the total cost of machinery or equipment you have purchased outright or leased. Capital allowance can be claimed if the equipment is bought or purchased outright or if you have bought it through a hire purchase agreement, or if it is supplied to you through a lease. But the lease must be at least five years – seven, in some cases. If the lease is shorter than this, the leasing provider, such as Ultimate Finance, can benefit from capital allowance, and you can still have an indirect benefit through a lower charge for rental.

The basics on tax relief when purchasing or leasing assets

12You can acquire tax relief when you either purchase an asset outright, or when you lease that asset. The tax relief you can get from leasing an asset will, however, depend on both the type of lease you have as well as its length. The length and type of the lease will also have an effect on the VAT charges, which can be charged at particular incremental periods or upfront. Your overall expense when leasing or renting an asset can be classified as deductible as it falls under business expenses, which will then reduce your company’s tax bill.

Furthermore, if you are expecting to own the equipment or machinery at the end of its period of lease or hire purchase, then this will be classified as a ‘supply of goods’ (for purposes of VAT). This means that you will have to settle the VAT for the asset’s complete value at the beginning of the contract or agreement. If your company is registered for VAT and you would like to reclaim or recover the VAT and then sell the asset eventually, you may also have to consider the VAT on the asset’s overall selling price. If, on the other hand, you decide not to purchase the equipment or will not own the equipment at the end of your hire purchase or lease agreement, then this will be classified as a ‘supply of services’ for purposes of VAT. This means that the VAT should be periodically paid.

You also have to keep in mind that if your leased or hire purchased asset or equipment is a vehicle, you may have to deal with various restrictions on reclaiming VAT.