If you are in the process of purchasing new or used equipment for your business and considering leasing, you will want to understand the tax benefits for your business and if they apply to your purchase.
We've put together this simple guide to explain what the tax benefits could be for your business.
Leasing is 100% Tax Deductible
Many companies both large and small, choose to lease rather than purchase equipment with their cash reserves. This is because lease rental is 100% tax deductible, and all payments made for the equipment are written off against the company’s tax bill. For any profit-making business, this means a substantial saving in the real cost of acquiring equipment by lease rental.
Payments on qualifying leases are written off as direct operating expenses, rather than a debt or outstanding liability, thus reducing short-term taxable income. All capital allowances are passed on to you, and lease payments can be offset against taxable profits. VAT can also be reclaimed on monthly payments. The status as a “lease” as opposed to a “liability” on a company’s balance sheet is something the banks often like to see, which is why a lease can be attractive. For this reason, leasing is often referred to as an ‘off balance sheet’ financing – a huge advantage to both large and small businesses.
Leasing and the Company Balance Sheet
When using a lease to acquire new business assets, the title of the goods remains with the Lender or Broker who has funded the lease. With no title ownership, the equipment would not show on the balance sheet; therefore, not needed to be shown to depreciate over a fixed period of time.
If Reality arranges the funding for your new asset, we would be the “third party” mentioned within the lease agreement, as we purchase the equipment from the supplier and then sell it to your business. This means that you can use the equipment as your own and own it at the end of the leasing term.
The Immediate Advantage of Leasing
Leasing converts a large capital expenditure into smaller monthly payments. Hence your company would have the profit-making equipment immediately and keep cash reserves for a rainy day. Rather than investing the precious cash reserves in depreciating assets, you can use them to help increase profits. The disadvantage to buying equipment outright is that the capital invested becomes a depreciating asset. This is an asset with decreasing value over time. The total amount that assets have depreciated during a reporting period is shown on the cash flow statement and also makes up part of the expenses shown on the income statement. The amount that assets have depreciated by the end date is shown on the balance sheet.
Example in Numbers
Lease Cost Illustration
You lease a machine that costs
£20,000 + VAT over 3 years
Monthly Payment
£658 + VAT
Total Paid Over Term
£23,688
Tax Relief (19%)
£4,500.72
Net Cost of Lease
£19,187.28
*Tax treatment depends on individual circumstances and may change. Please seek independent tax advice.
Are lease payments tax deductible?
Yes. In most cases, lease payments are treated as a business expense and can be deducted from your taxable profits, helping reduce your overall Corporation Tax bill.
How does leasing reduce my tax bill?
Because lease payments are spread monthly and fully deductible, they reduce your taxable profit over time—lowering the amount of tax your business pays
Can I reclaim VAT on lease payments?
If your business is VAT registered, you can usually reclaim VAT on lease payments (subject to usage and asset type).
Is leasing more tax efficient than buying?
Leasing can be more tax efficient because:
Payments are immediately deductible
VAT is spread across payments
No large upfront capital spend
Buying may rely on capital allowances instead, which can be more complex.
Is leasing suitable for all businesses?
Leasing is commonly used by profitable UK Limited Companies, particularly those looking to:
This guide explains how funding works across VAT, Corporation Tax, and Self-Assessment, and how businesses are using it not just to pay tax - but to manage cash flow more strategically.
