2 min read
What outright purchase means for your balance sheet
When your company buys an asset, it appears as a fixed asset and depreciates over its useful life. Cash or borrowings fund the purchase on day one, which affects both your liquidity and your debt ratios immediately.
The tax advantage can be significant: the Annual Investment Allowance allows qualifying plant and machinery to be written off against taxable profit in the year of purchase, subject to the prevailing AIA limit. Confirm the current limit with your accountant before modelling, as it has changed frequently.
How leasing affects cash flow and tax
Under a finance lease, the asset and a corresponding liability both appear on the balance sheet under FRS 102. Lease payments are split between interest and capital reduction, and depreciation is charged over the asset's useful life. The net tax effect is broadly similar to ownership over the full term.
Under an operating lease, the asset stays off the lessee's balance sheet and rental payments are expensed as incurred — helpful for gearing ratios and useful when the company expects to upgrade assets regularly.
Technology and obsolescence risk
For assets that depreciate rapidly — production software, vehicles, certain IT hardware — leasing transfers obsolescence risk to the lessor. Your company returns the equipment at lease end and takes a newer model without carrying a residual value risk on the balance sheet.
For assets with long, predictable useful lives and strong residual values — commercial premises fit-out, specialist manufacturing machinery — ownership often makes more financial sense over a five-year horizon.
Questions to ask before deciding
- How quickly will this asset become obsolete?
- Does the company have sufficient taxable profit to absorb a large AIA deduction in year one?
- Will lenders or investors scrutinise the company's gearing ratio?
- Is cash conservation more valuable than long-run cost saving?
- What is the asset's expected residual value at end of useful life?
Frequently asked questions
Can a company claim VAT on a finance lease?
VAT on finance lease rentals is reclaimable by VAT-registered companies in the same way as on a purchase, provided the asset is used for taxable business purposes. Operating lease VAT treatment differs slightly — take advice from your accountant.
Is hire purchase the same as leasing?
No. Hire purchase transfers ownership to your company at the end of the agreement. A lease — particularly an operating lease — does not confer ownership. See our separate comparison of hire purchase and leasing for a fuller breakdown.
Funding for UK limited companies
Credicorp lends to your company, not to you personally — short-term working capital with no personal guarantee. See what your business could access.