Hire Purchase or Leasing – What are the Best Options?
The UK is now a net importer of goods and the port of Felixstowe is one of the main routes to bring these goods into the country. It is therefore no surprise that the economy in the East of England is heavily dominated by the transport and logistics sector, says Ben Cussons, Associate Partner.
T he most recent figures published to the end of May 2023 by the government*, show that goods imported in the twelve-month period had a value of £901 billion compared to £842.7 billion exported. That is a lot of ‘things’ that needed to be moved. The hauliers responsible for moving these goods around the country are operating in a very capital-intensive industry, with a significant investment and/or commitment to a fleet of vehicles required to keep the economy going. These vehicles hold a significant balance sheet presence in these companies accounts and an important decision for hauliers and transport businesses is whether to lease or hire purchase (HP) their vehicles.
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Shown as an asset of the company and strengthens the balance sheet
However … you should bear in mind there may be limits to what you can afford. In addition to putting a deposit down, which at the very minimum will be the entire VAT value of the acquisition, the cost of servicing the debt may be difficult to maintain when other costs and revenues in your business may be fluctuating. Repayments will be over a set period, potentially longer than on a lease, adding a lot more debt to your balance sheet. Remember that buying outright will mean the responsibility of maintaining and servicing the vehicle is down to you, and the risks of dealing with expensive repairs like new tyres will need to be factored in. Furthermore, you need to consider the impact of your current ratio which will be worsened by the addition of debt (an element of which will be a current liability). This is important for those businesses with borrowings that have financial covenants attached.
• Once paid for the asset is yours and there is no immediate commitment to replace the asset, any future earnings out of the vehicle are yours
Cons: •
Requires initial outlay of cash in way of the deposit and funding of the VAT upfront • Significant liabilities used to borrow the money to finance the purchase of the asset may compromise raising additional finance • You are responsible for the ongoing maintenance costs and as the asset’s future life shortens then these are likely to increase Buying a truck on finance means you spread the cost over a period of time and the truck will belong to you at the end of the repayment period. Added to this, you can claim VAT back up front plus up to 25% in Corporation Tax reduction from day one, depending on your tax rates and where tax profits fall within the financial year. The truck will appear on your balance sheet as an asset (together with any associated acquisition costs), and because the HP finance is linked to the asset, it may be easier to source funding. At the end of the payment plan you will own the truck, to either keep using or sell on second hand.
There’s no obvious answer to this question, and there are pros and cons for each route.
Purchase – either outright or on finance
Buying second-hand
Pros: •
If you’re thinking of buying second hand rather than new, remember to factor in the number of miles the vehicle will be making, how it will be used, the cost of repairs to an aging vehicle, versus how much life is left in the truck.
Immediate Corporation Tax saving in the year of purchase based on 25% of the total costs of the asset, irrespective of whether bought outright or on finance • 100% of the VAT can be reclaimed on the cost of the asset
4 | SCRUTTON BLAND | TRANSPORT AND LOGISTICS
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