Prices Up, Interest Rates Up, Business Taxes Up, Cost of Leasing Down!

The UK Economy is moving toward a period of increased turbulence which will undoubtedly impact on the business environment.
Supply chain shortages combined with inflation, rising interest rates and an impending increase in businesses taxes will 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 we currently face and businesses do not defer much needed investment.

Prices Up

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 latest Consumer Price Index (CPI) inflation rate which ended in December 2021, as measured by the Office for National Statistics, stood at 5.1%, with predictions from The Bank of England that this rate will rise to above 7% by April 2022. Inflation is a new headache for business leaders.

Inflation and leasing

There are two reasons why taking out a leasing agreement during a period of high inflation makes sense for businesses:

1. As prices rise rapidly, it is important to strike a deal as soon as a solution is available, any delays 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.

2. 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. This 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.

Interest Rates

In response to higher than expected inflation, the Bank of England announced a rise in bank base rate from 0.25% to 0.5% on 3 February 2022 and signalled that higher interest rates can be expected during the current year.

Interest Rates and Leasing

Whilst interest rates are now rising, they are doing so from historically low levels. 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. Presently, it is a particularly good time to negotiate a leasing deal, as it locks in future rental payments reflecting the current, rather than future cost of leasing.

Tax

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.

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 conclusion, leasing has traditionally always offered the benefit of preserving cash in the business and providing a means of easy future upgrade. Now, three of the biggest obstacles businesses are currently facing when making investment decisions, to a large extent, can be offset by the use of leasing as a means of acquisition.

Disclaimer
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.