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Across the manufacturing and engineering sector, vehicles and machinery are critical for logistics, site operations, and service delivery across the business.
But these businesses are also typically very capital-intensive, with assets holding a significant balance sheet presence in accounts, making asset financing a strategic issue. With decisions affecting not only cash flow and tax planning but also operational agility and long-term asset management.
In this article Ben Cussons, Business Advisory Partner explores the different options for asset financing, and what to consider when it comes to making a choice for your business.
As with many things, there’s no right answer for everyone here, there are pros and cons to each route. But to begin with there are some considerations you might want to think about before you start:
How often are the assets going to be used? And what’s their average lifespan? High-usage fleets may wear out faster, affecting residual value.
What’s your cash flow like? You may have capital available or predictable revenue streams.
What’s the operational flexibility of the different types of purchase? What happens if you need to scale the fleet up or down quickly?
How long will the technology last? Specialist or tech-heavy assets can become obsolete much quicker.
Ultimately each option will have a different impact on your balance sheet too.
Purchase – Outright or Hire Purchase
Pros:
- Immediate Corporation Tax saving in the year of purchase based on 25% of the total costs of the asset, irrespective of whether you purchase outright or on finance.
- 100% of the VAT can be reclaimed on the cost of the asset.
- Shown as an asset of the company which strengthens the balance sheet.
- Once paid for the asset is yours and there is no immediate commitment to replace the asset, any future earnings out of the asset are yours.
Cons:
- Requires initial outlay of cash by way of the deposit and funding of the VAT upfront.
- Significant liabilities used to borrow the money to finance the purchase of the asset may compromise raising additional finance.
- You are responsible for the ongoing maintenance costs and as the asset’s future life shortens – these are likely to increase.
Buying an asset on finance means you spread the cost over a period of time and the asset will belong to you at the end of the repayment period. You can also claim the VAT back up front, plus there’s up to 25% in Corporation Tax reduction from day one, depending on your tax rates and where tax profits fall within the financial year.
The asset will appear on your balance sheet as an asset (together with any associated acquisition costs), and because the HP finance is linked to the asset, it may be easier to source funding. At the end of the payment plan you will own the asset, to either keep using or sell on second hand.
However, you should bear in mind that there may be limits as to what you can afford. As well as putting a deposit down – which at the very minimum will be the entire VAT value of the acquisition – the cost of servicing the debt may be difficult to maintain when other costs and revenues in your business may be fluctuating.
Repayments will be over a set period, potentially longer than on a lease, adding a lot more debt to your balance sheet. Remember that buying outright will mean the responsibility of maintaining and servicing the asset is down to you, and the risks of dealing with expensive repairs will need to be factored in.
Furthermore, you need to consider the impact of your current ratio which will be worsened by the addition of debt (an element of which will be a current liability). This is important for those businesses with borrowings that have financial covenants attached.
Operating Leases
Pros:
- Reduced initial outlay of cash.
- Fixed monthly spend, often includes maintenance costs built into the monthly amount for the period of the lease.
- Currently doesn’t show as a liability on the company’s balance sheet
Cons:
- No use of the asset once lease term expired.
- Need to enter into a new contract to replace the asset.
- VAT is typically claimed monthly on the lease rentals.
- May incur additional charges if you exceed the agreed usage as set out in the initial contract.
Leasing is a popular option and will provide some certainty over outgoings as the repayments are fixed over a finite period. However other costs often materialise, and leasing companies will be passing those on to their clients, so don’t expect any irresistible deals.
Many lease contracts will have a maintenance plan as part of the contract and there is a tax relief element as VAT can be claimed back as payments are made.
On the other hand, the most obvious point is that the asset will not belong to you. So, you won’t have the option to sell it if your business needs change, or if you need to realise your assets.
Leased assets and their associated liabilities are not (currently) included on the company’s balance sheet; instead, you must disclose operating lease commitments in the notes to the accounts.
Accounting Treatment of a Purchase on Finance
If you have taken out debt to finance the purchase of the asset, you will have a large asset and liability on the balance sheet. A deposit is likely to be required initially and then the asset will be brought over a set period, which is likely to be longer than a lease period would be. This would add a lot more debt to your balance sheet over time and represents a bigger commitment than leasing.
A fixed asset needs to be recognised for the acquisition costs which will then be depreciated over a number of years, often over the term of the lease. A liability is also recognised for the obligation of the future instalments of the agreement. Consequently, buying makes the company appear more profitable but results in a weaker balance sheet.
Accounting for Operating Leases
Under current FRS102 rules a company doesn’t need to show leased assets as an asset in the accounts or recognise the liability for the future obligations. The rental payments are just expensed to the statement of profit and loss, but a disclosure also needs to be included for the remaining commitment of the lease. This can make you seem less profitable but with a stronger balance sheet from a finance point of view.
However, this changes for accounting periods commencing on or after 1 January 2026 which will see – for all except those leases that are short-term (12 months or less) or low-value – the need for an asset and liability to be recognised, regardless of whether the company leases or buys. The change will see assets under operating leases capitalised on your balance sheet (the ‘right-of-use’ asset) with a corresponding lease liability within creditors. You can find out more about this in our article here Changes to FRS102: Operating Leases – Scrutton Bland.
Any decision on leasing or purchasing assets, whatever your business sector should always be made on the merits to your company and any future plans you have.
For advice that’s bespoke to you on this topic, get in contact with Ben or one of the Business Advisory team by calling 0330 058 6559 or email hello@scruttonbland.co.uk
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