The finance company will buy the equipment and lease it to the customer in return for monthly rentals. VAT is calculated on the monthly rentals, and therefore not paid at the start of the agreement, thus, reducing the upfront cost.
At the end of the primary period the customer can:
- hand the equipment back to the finance company
- sell to a third party on behalf of the finance company and retain a percentage of the sales proceeds
- continue renting it after the primary period ends
The machine must be comprehensively insured by the lessee.
- Cost control – size and timing of rentals agreed in advance to support confident budgeting.
- Tax efficient – rentals are normally fully allowable against taxable profit.
- Account treatment – Asset can be treated as “on balance sheet”.
- Free up capital – VAT is spread over the life of the agreement, keeping upfront costs down, which can have cash-flow value.
- Disposal proceeds – Lessee benefits from the sale proceeds on disposal following the end of the Primary Period, so repays careful use.