Our accountants have faced a plethora of lease questions in their time. Is leasing a good deal? How should you record the cost of a lease? Do leased items become assets? All valid questions, the answers to which depend on what kind of lease you are taking out.
What is a lease?
A lease is basically a way to use an asset without buying it in full. Seems simple enough, but salesmen often aren’t the most trustworthy bunch and it isn’t always clear exactly what kind of lease you’re entering into when you sign on the dotted line.
There are two kinds of leases you’ll probably run into in the course of running your business: an operating lease, and a financial lease.
You should think of an operating lease like a rental. If you’re purchasing, say, a new photocopier, you may opt for an operating lease. This means that the company offering the photocopier still owns the machine, and is usually in charge of maintenance, and replacing it wholesale once it has reached the end of its useful life.
In the case of an Operating Lease, your company is not taking on any assets, and so can apportion the entire cost as a business expense for as long as the lease lasts.
Financial Leases are a little more complicated, and essentially amount to purchasing the item in question and taking on responsibility for it, but paying over a period of time with interest added on top.
Let’s take the example of a new van for your company. With a Financial Lease, the van would become a company asset just as if you had bought it outright. Your company can then claim Capital Allowance on the van of 20%, but can only claim the interest from the lease as an expense.
In accounting terms, a financial lease is quite similar to taking out a loan, except instead of getting a chunk of cash you are getting a company asset instead.
If in doubt
When entering into a lease, it’s important to find out what kind of lease you’re signing up for. It will usually be obvious, but there is some middle ground where both types of lease can be used. Laptops, for example, can be purchased from big suppliers on either an operating or financial lease.
If you’re looking for other ways to save your business money, you can check out our article on “Eight ways to start a business on a shoestring budget“.
As always, if in doubt, consult your accountant, who can advise you on the best course of action for your business.