As we start the new Financial Year, there is no doubt that the progressively turbulent nature of the UK Economy has persistently incurred significant ramifications for our current business environment. In recent times, a combination of fluctuating business taxes, rising interest rates, supply chain shortages and a higher rate of price inflation all function to complicate the ease at which businesses are able to invest in new equipment. However, the use of leasing to acquire new technology can dilute some of the typical obstacles that business owners often face.
'Tax doesn't have to be taxing' is one of HM Revenue & Customs' favourite stock phrases, trumpeted during the simplification of income tax returns and periodically revived as a slogan whenever tax legislation undergoes change.
With this in mind, Corporation Tax on the profits generated by limited companies is scheduled to rise from 19% to 25% from 1 April 2023 on annual profits above £200,000, which poses the question - what does this mean for businesses?
Usually, rental payments on hire agreements are treated as a business expense for tax purposes. As a result, the cost of a leasing agreement can be deducted from pre-tax profits to reduce the real cost by the marginal rate of tax paid by any end-user. Traditional benefits of leasing equipment include preserving cash in the business and providing a means of easy future upgrade.
As of 1 April 2023, rental payments on any leasing agreement signed in 2022 will now reduce by 6% for companies facing a corporation tax increase from 19% to 25%. To a certain extent, the difficulties that businesses currently encounter when making investment decisions can now be offset by the use of leasing as a means of acquisition.
The Bank of England has also announced a rise in base rate from 0.25% to 0.5% on 3 February 2022 in response to higher than expected inflation. It has been further preempted that higher interest rates can be expected over the course of the current year.
Whilst we observe that interest rates are certainly rising, it is important to note that they are doing so from historically low levels. The cost of leasing is fundamentally based on the level of interest rates prevailing at the time a deal is signed. Seeing as rates are expected to increase over the coming months, it appears now could be a suitable time to negotiate a leasing deal. This will secure future rental payments based upon the current cost of leasing as opposed to the future cost, which will undoubtedly be higher.
We need not mention the dramatic increase in the cost of fuel and associated supply chain shortages; it is evident for all to see. However, UK prices are now rising at a faster rate than ever before, meaning that inflation is proving to be an evermore problematic and pressing issue for business owners.
Measured by the Office for National Statistics, the Consumer Price Index (CPI) inflation rate for the previous twelve months ended in December 2021 and stood at 5.1%, with predictions from The Bank Of England that this rate will rise to above 7% by April 2022.
With the statistics as they are, taking out a leasing agreement during a period of high inflation does make financial sense.
Considering prices are rising rapidly, it is wise to secure an agreement as soon as a solution is available to you as delays will incur additional expense. Leasing provides immediate access for the acquisition of an asset without requiring the cash expenditure necessary for outright purchase or the time-consuming process of setting up a credit line with your bank.
As a fixed price contract, leasing enables rental payments negotiated today to remain the same throughout the term of an agreement.
Inflation reduces the value of money over time. So, rental payments negotiated today will be reduced at a rate corresponding to the underlying rate of inflation.
Essentially, the lease becomes cheaper over time despite the fact that rental payments will remain the same.