Home » Expand - October 2007 »Spreading the cost of your IT

Spreading the cost of your IT

Investing in IT can be costly but you needn’t pay upfront. By spreading the cost, you could help free up the capital in your business, pay less tax and avoid taking out a major loan

When you’re expanding your business, the last thing you want to do is spend all your much needed cash upfront. Ideally you want to pay as you grow or as the new expansion starts to bring in revenue. Unfortunately business expansion and growth all usually involve a move to new IT equipment, which is costly if bought outright and adds even more pressure on cash flow.

If you haven’t got the cash upfront then there are three basic choices: hire-purchase, finance leases and operating leases. Both hire-purchase and finance leases involve owning the equipment at some point, and incur costs for capitalisation and depreciation. Also, while some of the payments and VAT can be tax deductible, they’re not as tax efficient as operating leases.

With an operating lease you simply rent the equipment you need for a term – and at the end of that period you have the option to continue renting, start again with new equipment or to simply buy the equipment outright at current market value. Because you’re spreading your payments over the useful life of the equipment you buy, you save capital for other major purchases.

There could also be tax benefits to renting rather than buying. You may be able to claim the whole cost of computer rental as a business expense – offsetting the full amount against your profits and lowering your tax bill at the end of the year.

By contrast, if you were to buy a computer your initial outlay would be considered a capital asset – and because the Government has recently stopped offering 100 percent capital allowance on computer equipment in the first year for small businesses, buying it outright is less tax efficient than it used to be.

With an operating lease, the asset – in this case, your IT equipment software and hardware and services – is rented for a period and then returned to the owner. The asset is not capitalised, the rental payments charged to your profit and loss account are fully tax deductible, and the VAT part of the rental cost will be recoverable providing the asset is used for business purposes. Under tax rules, even software is sometimes considered a capital asset if it is an endurable product rather than, say, an update that has only a short useful life.

There are also benefits to renting when the equipment comes to the end of its life. Because you don’t actually own the asset, you don’t have to worry about the disposal or the upgrade cost, as you have the choice begin a new renting agreement with new and more modern equipment.

SmartPlan

SmartPlan is an exclusive rental option for PC World Business customers

SmartPlan enables you to benefit from the best technology without having to purchase upfront:

  • Spread your costs
  • Keep more of your capital available
  • No purchased-equipment depreciation
  • 36- and 48-month rental terms
  • 100 percent tax deductible*
  • Up to £15,000 credit**
  • Approval in minutes
  • Any product on a plan, each product must cost over £250 (ex VAT)
  • Add products to match your needs as your business grows

Why buy when you can rent? For more information, speak to a Business Advisor on 08701 600 902

* All references to taxation, VAT and accounting are subject to confirmation by a professional advisor

** Subject to credit approval

This article originally appeared in the October 2007 edition of Expand.