The Principal of Lease Rental
Leasing is a contract between the leasing company (the Lessor) and the customer (the Lessee) where:
- The leasing company buys and owns an asset that the lessee has selected.
- The customer hires the asset from the leasing company and pays rentals over a pre-determined period, for the use of the asset.
As owner of the asset the leasing company can obtain capital allowances, and transfer the benefit to the customer by way of reduced rentals. An alternative would be to look at contract hire or lease purchase.
A customer cannot gain title to the asset although, in the case of a finance lease, he will normally have the option to enter a secondary rental period once the primary period has ended.
What are secondary periods and rentals?
Under a finance lease, the period of hire is made up of two parts:
(a) Primary Period (mandatory)
(b) Secondary Period (optional)
The customer has the option under most finance leases to extend the contract beyond the primary period but is not obliged to do so. The primary period rentals will usually cover the entire capital cost of the asset and leasing charges for the primary period. Secondary period rentals vary depending upon the primary period of hire. In most cases the rental is calculated as a percentage of the original cost price of the asset excluding VAT.
What is a finance lease?
The primary period rentals cover all, or substantially all, of the cost of the asset (i.e. the present value of rentals is equal to or greater than 90% of the cost of the asset). The leasing company claims allowances using normal written down allowances. The customer can, subject to eligibility, claim both tax relief and VAT on rentals paid.
- It allows you to spread the cost of an asset over a pre-determined period of time
- The Vat is paid on the monthly rentals and can be claimed back.
- As with finance leases, you do not claim writing down allowances, but simply offset the lease rentals against tax.
- A hire purchase agreement is independent if any other financial arrangements you or your business may have, such as a bank overdraft. Thereby preserving existing credit lines open to the business.
- Improved cash-flow
- Writing down allowances
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