If you have the cash and expect to use an asset for most of its working life, buying outright is usually the cheapest option overall. If cash is tight, the asset will be out of date quickly, or you want to hand it back at the end, leasing is often the better fit.
The decision is less about tax than most people expect. It is mainly about cash flow, who owns the asset, and how much flexibility you need over the next few years.
Buying outright
When you buy an asset, you pay the full price up front and own it from day one. There are no monthly commitments, no interest and no restrictions on how you use, modify or sell it.
The cost is the hit to your bank balance. A large purchase can leave you short of working capital just when you need it for stock, wages or a quiet month. Once the money is spent on a machine or vehicle, it is not easy to get back.
You also carry the risk of the asset. If it breaks down outside warranty, falls in value faster than expected or becomes obsolete, that is your problem. On the other hand, anything it is worth at the end belongs to you.
Leasing
With a lease, you pay a regular rental to use the asset for an agreed period. At the end, you usually hand it back, extend the agreement or upgrade to a newer model. Ownership stays with the leasing company.
The main attraction is that the cost is spread. You keep your cash for other things and the monthly payment is predictable, which makes budgeting easier. Some leases include maintenance, which removes a further unknown.
The trade-off is that you pay more in total, because the lessor builds in its own finance cost and profit. You are also tied into a contract. Ending early can be expensive, and there may be mileage limits, condition requirements and charges for damage when the asset goes back.
A worked example
Suppose you need a piece of equipment costing £40,000 that you expect to use for six years. The figures below are illustrative.
- Buy outright: £40,000 leaves the bank on day one. After six years you might sell it for, say, £6,000, so the net cost is £34,000.
- Lease over four years: rentals of £950 a month total £45,600. You then return it and need a replacement for the last two years, which means a new agreement.
On these numbers, buying is clearly cheaper over six years. But if spending £40,000 now would leave you relying on an overdraft for months, the interest and stress of that may outweigh the saving. If the equipment is likely to be superseded after three or four years, leasing and upgrading may also make more sense than the headline numbers suggest.
Questions to ask yourself
- How long will I use it? The longer you keep an asset, the more buying tends to win.
- How quickly does it date? IT equipment and some vehicles lose value and usefulness fast. Plant and machinery often lasts much longer.
- What else does the cash need to do? If buying would squeeze working capital or delay other investment, spreading the cost has real value.
- Do I want to own it? Owned assets can be sold, borrowed against or adapted. Leased assets cannot.
- Can I live with the contract terms? Read the early termination, maintenance and return conditions before you sign.
Hire purchase sits between the two: you spread the cost but own the asset at the end. It is worth comparing alongside outright purchase and leasing.
A short note on tax
The tax treatment differs, but it rarely changes the answer on its own. When you buy, the cost is relieved through capital allowances. Most plant and machinery qualifies for the £1m Annual Investment Allowance, and companies can also claim full expensing on new main-rate assets. Cars do not qualify for the Annual Investment Allowance. Lease rentals are generally deducted as a business expense as they are paid, although 15 percent of the rental is disallowed on cars with CO2 emissions over 50g/km.
VAT also differs. VAT on buying a car is usually blocked, while 50 percent of the VAT on car lease rentals is blocked where there is private use. VAT on vans is normally recoverable either way. We cover the detail of hire purchase and lease rentals in a separate article.
What to do
- Work out the total cost of each option over the period you expect to use the asset, including any resale value.
- Run the purchase through your cash flow forecast to see whether you can comfortably afford it.
- Get written quotes and read the lease terms, especially early exit and return conditions.
- Check the VAT and tax position before committing, particularly for cars.
If you would like us to compare the options for a specific purchase, book a free call.
