A lease is a contractual agreement between a Lessee and a Lessor over a given period.
The main difference between a Hire Purchase Agreement and a Lease, is that with a Lease, ownership of the goods will always be with the finance provider (Lessor)
The Lessor, is the owner of the asset or equipment, which would be either the manufacturer or the independent finance company that has purchased the goods, and The Lessee is the company or person that wishes to rent the asset or equipment.
With a lease, it is the Lessor (owner) who would reclaim the vat element on the purchase price of the goods, The Lessee, would be charged VAT would on the monthly repayments, as with any other service or hire, at the prevailing vat applicable rate.
Period of Hire
The term of a lease is generally referred to as the ‘Primary Hire’ period. The lessee can choose the period of hire typically between 2 and 5 years on a normal financial lease.
When the ‘Primary Period’ is due to end, there may be an option to extend the lease by entering into a ‘Secondary Hire’ period. This is where an additional sum is agreed with the Lessor, to continue with the hiring and is usually an annual payment or reduced monthly payments. Each finance house may have their own policies in dealing with the end of primary terms, but typically the goods can be either handed back to the lessor, sold to a third party or the option of entering into the secondary period.
However, there are many names for different types of leases, and it is essential that you understand the type of lease that you are entering into. Expert advice from your accountants or lawyers should be sought before you enter into a lease if you are unsure of what you are agreeing and entering into. It should be noted that some funders will not offer a rebate of interest or reduction should you wish to end the lease contract early or exchange the goods.
The two main types are:
- Financial Lease
- Operating Lease
With a financial lease, the assets would be used by the lessee, as thou the goods were their own, ie, they would have full control of the asset and they must insure and maintain the goods correctly. The Lessor would agree a monthly rental that would generally be on equal payments over the lease primary term. This would usually be based on the cost of the asset and an interest charge. From the Lessees point of view, there is no capital and interest split, it is just a monthly rental charge for the use of the goods. Although, not a policy of County’s, generally, there are no cancellation rights with a lease, and therefore the lessee is accountable for all the payments due under the terms of the lease so it is advisable to ensure the goods are fit for purpose before entering into a lease contract as it may be expensive to change. There are tax benefits to having a financial lease as 100% of the primary rentals are tax deductible and are shown as an asset on the balance sheet.
Unlike a finance lease, this is an ‘off balance’ sheet rental agreement only. The cost of the equipment is not relevant to the monthly charge that is agreed between you and the owner, however, there is no option of ownership and the goods must be returned at the end of the agreed rental period.
These types of agreements are generally used to keep the monthly rental as low as possible, enabling hirers to ensure that the return is greater than the net cost of the asset, as the Lessor underwrites the guaranteed future value.
With Operating leases, maintenance can be included or excluded dependent on preference and the nature of the work being undertaken.
Advantages of Leasing
- Vat is only paid on the monthly rentals, not on the purchase price of the goods, thus being more lenient on cash flow
- The rentals are 100% Tax Allowable.
- On balance sheet product
- Ability at the end of the primary lease period to enter into a secondary rental term for as long as the goods are required or fit for purpose