The UK Economy is now in a period of increased turbulence which is having a major impact on the business environment.
Supply chain shortages combined with a higher rate of price inflation, rising interest rates and an impending increase in business taxes, complicate the requirement by businesses to invest in new equipment. However, the use of leasing as a means of acquiring new technology, can offset some of the obvious difficulties the UK currently faces and avoids the temptation to defer much needed investment.
Driven, amongst over things, by a huge increase in the cost of fuel and supply chain shortages, prices in the UK are now rising at their fastest rate for many years. The Consumer Price Index (CPI) inflation rate for the twelve months ended in April 2022, as measured by the Office for National Statistics, this stood at 9%. The highest rate for 40 years and a source of serious concern for business leaders.
Inflation and leasing
There are two reasons why taking out a leasing agreement during a period of high inflation makes business sense:
- On the basis that prices are rising rapidly it is important to strike a deal as soon as a solution is available because any delay will incur additional expense. Leasing provides immediate access to the means of acquisition without the need for a large cash outlay which would be necessary for outright purchase or the time-consuming process of setting up a banking credit line.
- Leasing is a fixed price contract which means rental payments negotiated today will remain the same throughout the term of an agreement. The effect of inflation is to reduce the value of money over time, which means that in real terms rental payments negotiated today will be reduced at a rate which corresponds to the underlying rate of inflation. In other words, the lease will become cheaper over time even though the rental payments remain the same.
In response to higher than expected inflation, the Bank of England has announced a series of rises in their base rate over recent months with further increases expected during the current year.
Interest Rates and Leasing
Whilst interest rates are now rising, they are doing so from historically low levels. Given that the cost of leasing is based on the level of interest rates prevailing at the time a deal is signed and that rates are expected to increase over future months, now represents a particularly good time to negotiate a leasing deal which locks in future rental payments reflecting the current, rather than future cost of leasing.
Corporation Tax which is paid 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. This policy might be reversed in the light of a changing political environment, however, it is worth noting how the rate of business taxes can affect the real cost of a leasing or asset finance agreement.
Tax and Leasing
Rental payments on hire agreements are normally treated as a business expense for tax purposes, this means that the cost of a leasing agreement can be deducted from pre-tax profits. The effect of this is to reduce the real cost of such agreements by the marginal rate of tax paid by any end-user.
Rental payments on any leasing agreement signed in 2022 will, in real terms, reduce by 6% from 1 April 2023 for any company facing a corporation tax increase from 19% to 25%.
In addition to the traditional benefits offered by leasing equipment, such as preserving cash in the business and providing a means of easy future upgrade, three of the biggest obstacles businesses currently face when making investment decisions can, to a large extent, can be offset by the use of leasing as a means of acquisition.
BNP Paribas Leasing Solutions is not authorised to provide tax advice. You should consult an accountant in order to understand the tax consequences of any investment decision.
Andy is an experienced sales and finance professional with over 25 years’ experience in sales aid leasing. Andy is widely recognised as an expert in business finance and has in recent years focused his attention on developing partner sales teams develop an understanding of how businesses secure project financing. His training programme – Finance Unlocked – is a highly rated customisable course and is offered at no cost to partners.
If you’re interested in helping your sales team overcome finance-related hurdles during the selling cycle, please get in touch with Andy on 07966 114 243 or email here. To read more visit our Finance Unlocked page here.