Hire Purchase / Leasing / Loan

The purpose of the following is to act as a 'memory jogger' to outline some of the features and benefits of Hire Purchase, Leasing and Loan. They are not intended to make you 'finance experts' but merely to make sure you are aware of the main benefits, particularly those of low cost and tax benefits.

Hire Purchase

What is it?

An agreement between the Finance Company who owns the equipment and the client who hires the equipment from the finance company. When all monies are paid on the agreement, ownership of the equipment is passed to the client.

How does it work?

The client selects the equipment. The dealer invoices the Finance Company who purchases the equipment. The client enters into the agreement for a fixed period of time for a fixed schedule of repayments.

How long does it last?

The agreement can vary up to 60 months in period. For some specialist equipment the agreement may be longer.

Who is responsible for the equipment?

The client normally taxes and insures the equipment during the period of the agreement. Service and maintenance is normally the responsibility of the client.

Tax effective - VAT

All VAT due is normally paid at the outset of the agreement and is recoverable via the client's VAT returns (provided he is VAT registered) in the usual procedure. It is also possible to finance the VAT to provide significant cash flow advantages.

Cash flow payments

Payments can be structured to meet customers needs.

Fixed Terms

All agreements are for a fixed, agreed term and cannot be called in before that term except in the event of customer default.

Leasing - Finance Lease

What is it?

Rental agreement between the Leasing Company (who own the equipment) and the customer (who hires the equipment), under which the customer has all the benefits of use but never obtains ownership.

How does it work?

The customer selects the equipment. The dealer invoices the Leasing Company who purchases the equipment. The client enters into the leasing agreement to hire the equipment for a fixed period of time on a fixed rental schedule.

How long does it last?

The hire period is normally fixed to the working life of the equipment. This can vary from 24-60 months. For some specialist equipment the hire period may be longer. At the end of the hire period, the customer will usually arrange to sell the equipment on behalf of the Leasing Company.

Who is responsible for the equipment?

The customer normally taxes and insures the equipment during the hire period. Service and maintenance is also usually the responsibility of the customer.

Low cost

Changes in the 1984 Finance Act finally being phased in during April 1986 resulted in increased leasing rentals. Despite those rental increases, it is still possible to fund leasing rentals lower on a pre-tax basis than other forms of funding.

Tax effective - rentals

Leasing rentals are normally wholly allowable as bona fide trading expenses against the customer's taxable income.

Low initial outlay

There is not need for any large initial cash payment.

Tax effective - VAT

VAT is added to all rentals as they fall due, so there is no initial lump sum to be found. The customer reclaims this back in the usual way (if VAT registered).

Cash flow payments

Payments can be structured to meet customers needs.

Fixed terms

All lease contracts are for a fixed, agreed term and cannot be called in before that term.

Maximum residual value

At the end of a lease, up to 100% of the sale proceeds can be returned to the customer in the form of rental rebates. He loses nothing by leasing - and gains by looking after the equipment.

Secondary rentals

The customer may continue to enjoy use of the machine beyond the fixed primary period of hire for a small annual rental.

Loans

How long does it last?

The agreement can vary up to 60 months is period. For some specialist equipment the agreement may be longer.

Notes:

• Variable repayments to suit cash flow
• Repayment period geared to working capital

Who is responsible for the equipment?

The client normally taxes and insures the equipment during the period of the agreement. Service and maintenance is also the responsibility of the client.

Cash flow payments

Payments can be structured to meet customers needs.

Fixed Terms

All agreements are for a fixed, agreed term and cannot be called in before that term except in the event of customer default. Similar to Hire Purchase but without title over the equipment.

VAT

All VAT is normally paid at the outset of the agreement and is recoverable via the client's VAT returns (provided he is VAT registered) in the usual procedure. The VAT can be financed so as to provide significant cash flow advantages.

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