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.

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 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.

INTEREST RATES

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.

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. 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.

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.

We’ve identified the five most common leasing misconceptions.  in this guide we debunk the perceived disadvantages and explain to you how leasing can benefit your business & customers.

Often if can be easy for potential customers offered an OPEX leasing solution, as an alternative to a CAPEX solution, to assume that it is too complicated or too costly. Partners that we work with today originally had concerns that their products weren’t suitable for leasing or their customer relationships will change when they buy into a leasing solutions.

We want to help you understand how leasing solutions can aid your customers and ultimately grow your business. In this article, we discuss five of the most common misconceptions we often tackle, and demonstrate the value leasing solutions can bring to you and your customers. 

 

• ‘Leasing solutions are too complicated.’
• ‘Customers prefer to own their own kit.’
• ‘Leasing solutions will take away our control and relationship with our customer.’
• ‘Our product isn’t suitable for leasing.’
• ‘Leasing solutions is too expensive.’

 

‘leasing solutions are too complicated.’

Selling equipment on lease will offer your customers an ability to acquire expensive capital equipment by way of relatively small monthly or quarterly repayments resulting in more sales and higher order values. The use of ‘on line’ tools to generate quotes and submit proposals for underwriting, as well as the ability to use electronic documentation and e-signatures makes the leasing process every bit as simple as selling for cash.

Here are 3 reasons why you should consider leasing:

The flexibility of monthly rentals

Monthly/quarterly rentals, with different terms and payment profiles, offer a large amount of flexibility as opposed to a cash deal. It can help overcome customer cost objections. Our ‘online’ pricing tool makes it easy to convert a cost price to monthly/quarterly rental options, giving your customers a choice of terms to suit their budgetary requirements.

Quick and easy credit approvals

A second simple step in the process of setting up a leasing agreement is to get your deal approved for credit. Proposals can be submitted ‘on line’ and in many cases you will be provided with an immediate automated decision. Our advice is to get the credit clearance in place before you visit the customer, which for limited companies, can normally be done without the customer having to provide any information.

We take care of the invoices

Unlike selling for cash, it is not necessary to negotiate invoice terms with the customer. Once the terms of the leasing agreement have been agreed, the customer will sign a contract to lease the equipment. The document can be signed electronically or in paper form, the choice is yours. Once the contract has been signed and the deal accepted all you need do is deliver the equipment and send the invoice to us. Collecting rental payments from your customer will then be our responsibility and you can concentrate on finding new customers.

 

‘customers prefer to own their own kit’

There are two circumstances where owning an asset makes sense:

• Where the intention is to keep the asset for many years.
• Where the asset is likely to appreciate in value over time.

It is for these reasons that in our private lives we like to buy our houses, if we can afford them and intend to stay put for a few years, but lease our cars. In the world of commerce, capital equipment is closer to cars than houses in this analogy. Technology moves quickly. It is important for businesses to replace equipment at regular intervals to maintain a competitive edge and comply with ever-changing health, safety and environmental legislation.

This is where leasing comes in. Leasing makes it very easy to upgrade equipment as and when necessary without having to find the funds necessary to purchase the equipment outright.

Here’s how the leasing lifecycle benefits business:

• The length of a leasing agreement matches the period over which a business intends using the equipment.
• If circumstances necessitate early replacement of equipment, a leasing agreement can be settled early and any outstanding rental payments re-financed within a new agreement, making the upgrade a seamless transition.
• Unlike ownership, there are no worries about disposing of original equipment at the time of replacement. When a lease ends the old equipment will simply be collected and in most cases replaced by new.

 

‘leasing will take away your control and relationship with the customer’

Taking out a leasing agreement will often strengthen the relationship between you and your clients: 

 A lasting relationship

A cash deal can sometimes represent the beginning and end of a relationship, whereas when equipment is sold on lease a relationship will be in place for at least the duration of the leasing agreement.

 Replacing and retaining equipment

A leasing deal provides a degree of control you, as the equipment supplier, will have when it comes to your customer replacing equipment. A lease will come to an end at a defined point in time. When this point is reached the original equipment supplier can normally control whether their customer can replace or retain the equipment. In the vast majority of cases the equipment is replaced by way of a new leasing agreement.

Upgrades

When a customer owns equipment there is no specific time at which any decision to upgrade has to be made. This means that outright purchase often results in equipment being retained beyond it’s useful economic life and delays the introduction of productivity-improving new technology.

 

‘Our product isn’t suitable for leasing’

Most, if not all, types of capital equipment are suitable for leasing, ranging from ships and aircraft to laptop computers and everything in between.

The Finance and Leasing Association, a trade body representing UK leasing companies, reported that £27bn of new asset finance lending to UK businesses was achieved in 2020 despite the pandemic-related recession. This represented over 34% of all capital equipment investment made by UK companies.

Leasing is a popular option for all types of organisation, with SMEs accounting for £16bn of the £27bn worth of business written in 2020. Corporates and The Public Sector are also dependent on leasing to fund some or all of their capital equipment requirements.

We generate most of our business through suppliers of equipment in a number of defined markets. Through many years of experience we have tailored finance products and service offerings to meet the needs of those markets and provide both suppliers and their customers with a compelling reason to make leasing the favoured means of acquiring new equipment.

 

‘leasing is too expensive’

There are certain factors which mean that in real terms the actual cost of a lease can be significantly lower than the sum of rental payments.

Firstly, all rental payments are fully tax allowable. This means that for tax paying organisations the real cost of any lease will be reduced by the equivalent of their marginal rate of taxation, which is currently 19% in the case of limited companies.

Secondly, there is often significant financial benefit by taking out a leasing agreement. Leasing allows you to invest the cash equivalent of purchasing the equipment into the running of a business. In simple terms this means that if the return on capital generated by a business is greater than the finance charges implicit with a leasing agreement, the leasing agreement in real terms will be cheaper than outright purchase. This is one of the most important reasons why many cash-rich businesses decide to lease all their capital equipment acquisitions.

Finally, leasing agreements represent particularly good value at the current time. This is because the cost of leasing is directly related to the general level of interest rates prevailing at the time a deal is struck and Bank of England base rate has been at, or around, it’s lowest ever level over recent times. No matter what happens to interest rates in the future the rental payments on a leasing agreement, once in place, remain unchanged.

 

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.

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.

Chancellor Rishi Sunak delivered his spring statement on Wednesday 23rd of March 2022, the backdrop to the statement consisted of economic data providing conflicting messages.

On the plus side, the latest figures from the Office for National Statistics showed tax receipts of £71.9 billion in February, with the total tax take so far this year £37 billion higher than that forecast by the Office for Budget Responsibility last October.

The reasonably sound state of public finances has been caused by stronger than expected recent economic growth, a high level of employment and a higher rate of inflation than forecast.

However, it is inflation which is also a factor on the other side of the equation, Britain’s borrowing is running at a much higher level than expected owing to higher debt interest payments on the significant amount of government debt, which carries interest charges indexed to prices, and with most forecasters expecting the inflation rate to stay high for months. The benefit of a higher tax take is offset by concerns about rising debt.

It is also inflation that has placed enormous political pressure on the Chancellor to shield consumers from the rapidly escalating cost of many items, particularly energy and fuel and so balancing the politics and economics was the key challenge, particularly with the shadow of Ukraine adding massive uncertainty to the global economy and the risk of a downturn in our own economy as inflation reduces the spending power of consumers.

A timely reminder of the impact of inflation was announced on the morning of the spring statement that UK prices rose by 6.2% in the 12 months to February, the fastest rate for 30 years. Much of the political pressure prior to the statement involved a demand for a cut in the taxes that are applied to fuel. Diesel and petrol prices reached record highs over recent days, leading to a rise in VAT and fuel duty revenues for the Government. There were also calls to delay or shelve the planned rise in national insurance contributions scheduled for April.

As anticipated, the announcements that will be taking effect within the next few weeks were measures to alleviate the escalating cost of living, including a 12 month reduction in fuel duty, an increased allowance before national insurance contributions are paid and tax cuts for domestic energy efficiency improvements. There was also a promise of a 1p cut in the basic rate of income tax within this parliament.

What about the prospects for business investment?

Whilst the spring statement was dominated by consumer-related issues, the Chancellor indicated that a key priority in the autumn budget will be to address the low rate of productivity within the UK economy. He indicated that this might be achieved in three areas:-

1.       Ideas
2.       People
3.       Capital

So far as ideas are concerned, promises of additional tax allowances to encourage spending on research and development (R & D) were given and similar initiatives in the form of allowances for training were offered to address the people aspect.

For those involved in the sale of capital equipment a promise was given that consideration would be given to measures that would encourage business investment. The super-deduction capital allowance will end from April 2023 and a review of it’s cost and success will influence the type allowances proposed in the autumn budget.

A statement issued by The Treasury which accompanied the spring statement suggested several measures were currently under consideration including accelerated allowances within the writing down allowance scheme and a permanent increase of the annual investment allowance from £200,000 per year to £500,000 (the temporary allowance of £1,000,000 ends in December 2022).

The Chancellor promised to consult widely before deciding on the precise measures that will be taken in the autumn and it might be that the asset finance and leasing industry will be given an opportunity to put forward a case that additional tax allowances be provided for all equipment acquired through leasing.

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.

For customers with a tax year ending on 31st March, the time to review capital equipment expenditure for the current financial year is now. This will include most sole traders and individuals trading within a partnership. There is, however, a need to act fast. There are two generous capital allowance schemes available under a hire purchase agreement. In order to qualify, any equipment concerned must be on site and available for use within the financial year in which the allowance is claimed.

For those businesses in the final quarter of their financial year, the two allowances referred to above enable the full capital allowance of a newly acquired asset to be offset against tax in this financial year. The added benefit is that, under a hire purchase agreement, payment for the equipment concerned can be spread over a number of future years. The two schemes are:

 

Annual Investment Allowance

 

A capital allowance equating to 100% of the cost price of a qualifying asset can be claimed against tax in the year of acquisition. This allowance has a cap of £1,000,000 for the calendar year 2022. It is available on new and used equipment and can be claimed against both income and corporation tax. This means that all business trading styles can benefit from the scheme.

 

Super-Deduction

 

A capital allowance equating to 130% of the cost price of a qualifying asset can be claimed against tax in the year of acquisition. You read it correctly! This scheme allows a business to claim a tax allowance on a sum that is 30% more than the actual cost of the asset. By any standard, this is one of the most generous tax allowances ever introduced.

 

Whilst there is no cap on the amount of expenditure allowed under this scheme during 2022, the allowance can only be claimed against corporation tax. This means it is not available to sole-traders and partnerships. Unlike the annual investment allowance, super-deduction is available for new equipment only. It is also worth pointing out that it cannot be claimed in cases where assets are purchased for onward hire.

 

Cars cannot be included for either allowance, but commercial vehicles, plant and machinery all qualify, subject to the conditions described above.

 

Many businesses have a financial year ending March 2022, and this can act as a powerful and immediate incentive to bring forward capital expenditure to reduce any current tax liability. To benefit from these allowances before the end of their financial year, a business needs to ensure that any qualifying equipment, acquired by way of a hire purchase agreement, is ordered and delivered during the current quarter.

 

A hire purchase agreement allows businesses to acquire the equipment they need now and get the full benefits of the generous capital allowances currently available, without the need for a large cash outlay. In other words, businesses can get the tax allowances in their current financial year but spread the cost of purchase over a number of future years. A further point to note is that the interest element on a hire purchase agreement can also be offset against tax as a business expense. This means that for companies expecting to see an increase in corporation tax from 19% to 25% from April 2023, the real cost of any hire purchase agreement signed this year will reduce from that date.

 

In conclusion, and providing stock is available, there are many businesses that have a strong financial incentive to bring forward the acquisition of capital equipment. This means they will be able to retain cash for investment elsewhere. Capital allowances claimed now, on equipment subject to hire purchase agreements, provide the perfect solution.

 

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.

The Chancellor of the Exchequer presented his budget on 27 October, claiming that the measures being taken, along with the support already provided to individuals and businesses (during the lockdowns between March 2020 and July 2021), would give the UK Economy every opportunity of prospering in the ‘Post-Covid World’.

Most notable so far as capital equipment sales are concerned was a decision to extend the £1,000,000 Annual Investment Allowance from 30 December 2021 until 31 March 2023, at which time Super-Deduction is also due to end.

• The construction sector is set to prosper from increased public spending to fund road building and public transport links.
• Some of the additional funding earmarked for the NHS will also be allocated for the acquisition of the latest technology, in areas such as diagnostics, which will provide new sales opportunities for manufacturers and suppliers of medical equipment.

Perhaps more significant than the Budget Policy announcements was the report that accompanied the Chancellor’s statement by The Office for Budget Responsibility (OBR). Chancellors use data from the OBR to assess how much money governments have available to spend on public services or to cut taxes. In this case, the OBR were able to report that economic growth was running at a faster rate than predicted earlier in the year, giving the Chancellor a £33 billion reduction in the level of expected borrowing over the mid-term. Half of this will be used to help fund additional public spending and the rest held in reserve for possible further increases in spending or pre-election tax cuts.

Given the large change in economic growth forecasts from March to October this year, there is of course a strong chance of further amendments to the current forecast, as we move through next year. The downside? The risk from an extended period of high inflation and associated increases in interest rates, as well as the potential for prolonged supply-side disruption caused by shortage of stock and labour. Some or all of these factors could reduce the predicted rate of economic growth in 2022, with high inflation being a particular threat, since it reduces the spending power of those consumers who do not receive a correspondingly high uplift in their income. Also, a further risk is that Covid will return with all its associated risks to the Economy and cannot be ruled out.

It is perhaps for these reasons that the Chancellor is holding onto some of the windfall presented by the OBR.

Leasing and Asset Finance can be very useful tools in overcoming the challenges presented by a higher level of price inflation and an environment where interest rates are rising.

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.

In a world where the virus itself is talked about less and less we seem to be feeling the knock-on effects more and more. The LCV market challenges around stock continue, with no end in sight for the issues caused by the shortage of semiconductors and other key raw materials.

The motor market continues to feel the effect of uncertain and limited supply – the car market experienced its weakest September since 1998, whilst the LCV market met its lowest September figures since the recession of 2009. The sector was down nearly 42% when compared to the pre-pandemic average.

It should be noted that these figures are on the back of a record August for the sector in what is usually the quietest month of the year. There is no doubt that the difficulties will not be over for some time and some experts predict as late as Q4 2022 as a best case.

Chief Executive of the SMMT commented,

September was a disappointing month for new van registrations, as the much-documented semiconductor shortage has started to impact supply. Manufacturers are doing all they can to fulfil orders and, after a strong year so far, demand still remains high. With businesses continuing to renew their fleets, there is a greater choice than ever of new zero emission models coming to market, helping ensure the commercial vehicle sector plays its part in decarbonising road transport.

[Source: Mike Hawes, Chief Executive SMMT, ssmt.co.uk]

Aligned to the stock shortage is the requirement to reduce emissions within the sector. We are seeing the momentum for Electric Vans building, proven by the dominance of non-ICE vehicles at this year’s Commercial Vehicle Show. The current penetration of electric vehicles is 1 in 38 vans registered in 2021 being fully electric (1 in 12 cars). This will increase as the supply chain improves. The proposed Clean Air Zones planned for some of the UK’s major cities will accelerate the move towards electric, but challenges still remain around the infrastructure to support the movement to this cleaner energy source.

Whilst the arrival of ‘Freedom Day’ passed with more confusion than celebration, it is more likely than not that we are on a path towards a business environment that will be more like 2019 than 2020. That’s not to say the path will be clear, or that some aspects of life under lockdown will be retained into the longer term.

There will be both new opportunities and new challenges for those of us involved in selling capital equipment. The British Chambers of Commerce released an economic forecast last month, which indicated strong growth in both gross domestic product (GDP) and business investment from the second half of 2021 throughout 2022. Whilst much of this expected increase in economic activity can be attributed to simply making up the ground lost between March 2020 and July 2021, other factors are worthy of consideration when it comes to ‘business to business’ sales.

One of the rare pieces of good news to have surfaced towards the end of last year was a report by the Office for National Statistics stating that UK productivity, measured by output per hour worked, increased at its fastest (year on year) rate in 15 years for the quarter ended September 2020. One explanation for this has been provided through research conducted by ‘Be The Business’, an industry-led campaign to raise standards and spread best practice. Their suggestion is that driven by necessity, many small and medium sized businesses are accelerating investment in new technology. The good news is that the tax system will continue to support business investment throughout 2021, but to take full advantage some businesses might need to act swiftly.

In November last year, the Chancellor announced that the Annual Investment Allowance (AIA) would be set at £1,000,000 for 2021, this marked a continuation of the allowance that was originally put in place only for 2019 and 2020. The AIA is the amount of money a business is able to spend on the purchase of capital equipment and claim the full tax allowance in the accounting year, in which the acquisition was completed. So, providing all assets bought are used for business purposes only, £1,000,000 of equipment can be purchased in 2021 and qualify for AIA which will provide a tax allowance of £190,000 for any business paying Corporation Tax at 19% for the accounting period, in which the equipment was acquired.

The key, however, to making full use of AIA is to ensure that the allowance is allocated in the most financially advantageous way between accounting years. This means that unless your customer has an accounting year that coincides with the calendar year (January to December), it will often prove beneficial to allocate the £1,000,000 allowance for 2021 between the two accounting years that fall within the calendar year and this is where 31^st March becomes a significant date. Many businesses have a financial year that ends on that date; which means if they want to maximise AIA for both their current and next accounting years, they have up to £250,000 of annual investment allowance available between 1 January and 31^st March 2021. This might provide a strong reason to bring forward any proposed capital equipment investment to ensure delivery during February and March.

The additional good news is that your customers can buy the equipment they need now and get the full benefits of the annual investment allowance available in February and March, without the need for a large cash outlay. This is possible because equipment subject to hire purchase finance agreements qualify for AIA in exactly the same way, as equipment purchased outright. In other words, your customers can get the tax allowances in their current accounting year but spread the cost of purchase over a number of years.

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.