Finance Lease
Finance Lease is not the product it used to be. Many years ago, lenders used to pass on the benefit of claiming capital allowances on the leased assets which effectively subsidised the lease interest calculation and made it a very cost effective method of financing cars and equipment.
Nowadays, repayments are normally the same (albeit adjusted for VAT) as the equivalent Hire Purchase figures. There are really only three benefits to a finance lease:-
1. On equipment and commercial vehicles it will help cashflow, where on Hire Purchase, the VAT on the full cost of the asset is paid in advance with any deposit. Finance Lease only requires vat to be paid on the actual payments and therefore will mean that you would not be out of pocket for the VAT. This is only a short term benefit until the VAT would have been reclaimed in full on Hire Purchase.
2. For non-vat registered businesses buying a commercial vehicle or equipment, the full VAT deposit would be payable up front on a Hire Purchase agreement which is dead money. With Finance Lease you can spread this cost, improving cashflow. If within 3 years, you decide to register for VAT, you would be able to retrospecively claim the VAT back for that period assuming you still have the item.
3. For pool cars and other cars under about £20,000 cost, where the car is either new or VAT Qualifying, by putting it on a Finance Lease, repayments will be cheaper as the papments are worked out on the net of vat cost and then vat is charged on this lower payment. You would then be able to claim 50% of the vat if the car is used for any personal use or 100% of the vat if you can prove that there is no personal use of the car whatsoever. A great way to save a good deal.
The downsides to a finance lease are:-
1. You technically never own it, after the initial lease period, you would need to pay a "peppercorn" rental.
2. If you sell the goods, you would need to pay over a percentage (typically 1-10%) of the sales proceeds to the lease company.
3. Settlement penalties can be more expensive.
Some people think that a finance lease is an "off balance sheet" type of finance agreement - it is not. Because you have potential profit in the sale of the equipment it is treated as a capital item on the balance sheet and the debt also appears in your liabilities.
This is probably the most complicated area of asset finance we are happy to speak to you about the specifics of such an agreement.
