Buying/Leasing machinery - P+L/balance sheet
Discussion
This may help Andy - https://maxxia.co.uk/blog/finance-lease-vs-operati...
Certainly in the past, operating leases (such as contract hire) were off-balance sheet while finance leases (where the lessee takes on the risk of resale value) remained on balance sheet.
(I can help with leasing quotes if you need - this is my area of business.)
Cheers, Richard
Certainly in the past, operating leases (such as contract hire) were off-balance sheet while finance leases (where the lessee takes on the risk of resale value) remained on balance sheet.
(I can help with leasing quotes if you need - this is my area of business.)
Cheers, Richard
In your example the £80k asset may well qualify for annual investment allowance or first year allowance, so you get tax relief on the full £80k in the first year.
You could also recover the full VAT if applicable on the next VAT return.
So those examples can help "tax" cashflow in the shorter term vs leasing assets.
You could also recover the full VAT if applicable on the next VAT return.
So those examples can help "tax" cashflow in the shorter term vs leasing assets.
AndyC_123 said:
Is there any benefit to the business other than cash flow of having something on P+L vs on balance sheet?
IE I buy a tractor for £80k Or I hire it for £300/week.
Do you have any plans to borrow against or sell the business in the next few years/for the X years the lease might run?IE I buy a tractor for £80k Or I hire it for £300/week.
MOBB said:
In your example the £80k asset may well qualify for annual investment allowance or first year allowance, so you get tax relief on the full £80k in the first year.
You could also recover the full VAT if applicable on the next VAT return.
So those examples can help "tax" cashflow in the shorter term vs leasing assets.
Depends on what type of accounts you would like to present to third parties.You could also recover the full VAT if applicable on the next VAT return.
So those examples can help "tax" cashflow in the shorter term vs leasing assets.
AndyC_123 said:
Is there any benefit to the business other than cash flow of having something on P+L vs on balance sheet?
IE I buy a tractor for £80k Or I hire it for £300/week.
One consideration is internal rate of return.IE I buy a tractor for £80k Or I hire it for £300/week.
In a sentence, if the business earns a higher return on cash left in the business than the cost of borrowing then it can make sense to borrow / fund / finance capital assets.
Whether the asset can be bought for more or less than usual during the current (lockdown) climate might be a consideration, too. Perhaps the tractor can be bought for half-price because nobody else is buying!
Thanks for the replies everyone. I'm OK at running the business but I think could be much better/smarter when it comes to the accounting side. My accountants are good at sorting things after year end but not planning before if that makes sense.
Can't multiquote so replies below:
annual investment allowance - looks interesting. So if I spent £200k on machines I could put that against tax? Probably spent £160-180k last FY.
No plans to borrow or sell business. Currently have no borrowings. Bank manager has offered various loans and phoned this week offering something backed by the government.
Not sure what type of accounts I want to present - could you clarify the differences?
We have a safety net of cash as I call it that's there just in case things go pete tong. Think we do get better purchase rates buying outright and "in cash".
Background if it matters: turnover last year was about £3.5m and net profit looks like it's going to be about £250k (so going to have a big tax bill hence this question). Got planning permission in for a new yard on some land we own but not sure if we will get it through. Only other option is to try and buy a yard which could potentially cost £1m (would need to borrow for that).
Thanks for your help sorry for sounding so thick.
Can't multiquote so replies below:
annual investment allowance - looks interesting. So if I spent £200k on machines I could put that against tax? Probably spent £160-180k last FY.
No plans to borrow or sell business. Currently have no borrowings. Bank manager has offered various loans and phoned this week offering something backed by the government.
Not sure what type of accounts I want to present - could you clarify the differences?
We have a safety net of cash as I call it that's there just in case things go pete tong. Think we do get better purchase rates buying outright and "in cash".
Background if it matters: turnover last year was about £3.5m and net profit looks like it's going to be about £250k (so going to have a big tax bill hence this question). Got planning permission in for a new yard on some land we own but not sure if we will get it through. Only other option is to try and buy a yard which could potentially cost £1m (would need to borrow for that).
Thanks for your help sorry for sounding so thick.
AndyC_123 said:
Thanks for the replies everyone. I'm OK at running the business but I think could be much better/smarter when it comes to the accounting side. My accountants are good at sorting things after year end but not planning before if that makes sense.
Can't multiquote so replies below:
annual investment allowance - looks interesting. So if I spent £200k on machines I could put that against tax? Probably spent £160-180k last FY.
No plans to borrow or sell business. Currently have no borrowings. Bank manager has offered various loans and phoned this week offering something backed by the government.
Not sure what type of accounts I want to present - could you clarify the differences?
We have a safety net of cash as I call it that's there just in case things go pete tong. Think we do get better purchase rates buying outright and "in cash".
Background if it matters: turnover last year was about £3.5m and net profit looks like it's going to be about £250k (so going to have a big tax bill hence this question). Got planning permission in for a new yard on some land we own but not sure if we will get it through. Only other option is to try and buy a yard which could potentially cost £1m (would need to borrow for that).
Thanks for your help sorry for sounding so thick.
If you are acquiring an asset without the use of finance, then obviously, if you buy it outright, the balance sheet will show a new fixed asset in its balance sheet but depleted cash reserves and that will result in depleted current assets. That will affect liquidity ratios. Whether that is an issue for the business depends on how much it relies on such ratios for future planning or policy decisions - or future borrowing.Can't multiquote so replies below:
annual investment allowance - looks interesting. So if I spent £200k on machines I could put that against tax? Probably spent £160-180k last FY.
No plans to borrow or sell business. Currently have no borrowings. Bank manager has offered various loans and phoned this week offering something backed by the government.
Not sure what type of accounts I want to present - could you clarify the differences?
We have a safety net of cash as I call it that's there just in case things go pete tong. Think we do get better purchase rates buying outright and "in cash".
Background if it matters: turnover last year was about £3.5m and net profit looks like it's going to be about £250k (so going to have a big tax bill hence this question). Got planning permission in for a new yard on some land we own but not sure if we will get it through. Only other option is to try and buy a yard which could potentially cost £1m (would need to borrow for that).
Thanks for your help sorry for sounding so thick.
The Profit and Loss account will look better because the only cost associated with the new asset will be the depreciation provision. There will be no finance costs associated with the new asset.
With Finance Leases, it is most likely the asset WILL be capitalised in the Fixed Assets and the "borrowing" aspect shown as a liability - so you will, get both finance costs AND depreciation showing up in the profit and loss account.
The finance costs posted to the profit and loss will essentially be the interest and finance charges associated with the lease repayments.The bulk of the finance payments are looked on as a "loan repayment" and are posted to the balance sheet to reduce the capital balance on the "loan" balance associated with the finance lease.
For Operational Leases, there is no impact on the balance sheet at all, but the full lease payments will be posted directly to the profit and loss account as the agreement is looked on as a simple rent or hire of asset.
There are also different tax reliefs available depending on whether the lease is a finance lease or an operational lease.
The finance costs posted to the profit and loss will essentially be the interest and finance charges associated with the lease repayments.The bulk of the finance payments are looked on as a "loan repayment" and are posted to the balance sheet to reduce the capital balance on the "loan" balance associated with the finance lease.
For Operational Leases, there is no impact on the balance sheet at all, but the full lease payments will be posted directly to the profit and loss account as the agreement is looked on as a simple rent or hire of asset.
There are also different tax reliefs available depending on whether the lease is a finance lease or an operational lease.
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