Plant & Equipment Finance

Any type of new equipment or machinery can be financed using a variety of methods:

• An Operating Lease is effectively a rental of the equipment for a pre-agreed period. Ownership remains with the finance company at all times and the rental payments are fully allowable against Corporation Tax by the hirer. VAT is paid (and reclaimed) on each rental payment, normally monthly. At the end of the lease period the asset is returned to the finance company, or another rental period at reduced rates is agreed.
• A Hire (or Lease) Purchase Agreement conveys the benefits of ownership of the equipment at the outset, although the finance company will have a lien over the asset until all payments have been made. Payments of capital and interest are made over a pre-agreed period with the interest element being fully allowable against Corporation Tax by the hirer. The equipment is capitalised in the hirers’ balance sheet on acquisition, and capital allowances for Corporation Tax purposes are available from point of acquisition. VAT on the full price is paid (and reclaimed) at the outset.
• A Finance Lease is similar to Hire (or Lease) Purchase, but ownership of the asset remains with the finance company. They claim the appropriate tax allowances on the asset, and this translates into a lower monthly cost to the hirer. The asset is capitalised in the books of the hirer and VAT is paid (and reclaimed) monthly. At the end of the pre-agreed lease period the hirer can either enter into a secondary lease period at a substantially reduced cost or sell the asset, retaining as much as 90% of the proceeds, with the balance going to the finance company.

Plant and Equipment currently in use can also be financed, although it must be both identifiable (normally by serial number) and durable. Funds can thus be released for other business purposes, for example expansion, restructuring etc. There are three main methods:

• The equipment can be sold to the finance company and rented back by way of an Operating Lease.
• The equipment can be sold to a finance company and purchased back by way of a Hire Purchase or Finance Lease agreement.
• A loan can be negotiated for the equipment value with the finance company taking a chattel mortgage over the equipment as its security.