A new lease of life

Pro

The question of whether to lease or not to lease never really arises with a photocopier. It is leased and that’s it. As a result, this often-underused asset frequently holds the latest office technology. However, the leasing of other equipment apart from the photocopier is something that few firms consider even though it’s perfect not only for common IT purchases like PCs and servers but also for industry-specific IT tools as well.

Moreover, leasing allows you to find a route to new computers every few years while also developing a relatively cheap, cross-platform and cross-manufacturer system to upgrade and acquire new equipment.

A lease is an agreement under which the legal owner of equipment — the technology manufacturer or reseller — allows an end user the use of this technology for a stated period of time in return for a series of payments. With a new generation of microprocessors emerging every 18 months or so and given the life expectancy of technology, leasing gives you more control and flexibility over the technology you use.

Nothing to lose
From a financial perspective, leasing allows for off-balance-sheet financing, resulting in tax savings and capital preservation through deferred payments. A lease line of credit, which allows for adding to existing equipment during the duration of the lease, can also be easily negotiated. A buyout clause, which swings in at the end of the lease, means that there is nothing to lose with a lease. You can still buy the IT equipment should that be the best option
for your business.

Under an operating lease, the technology supplier buys the equipment on behalf of the end-user on a customised payment structure. At the end of the period specified in the paperwork,
the lease may be renewed in tandem with a timely technology upgrade. The equipment may also be bought outright or returned to the reseller following the period specified in the paperwork

A finance lease is a loan arrangement in which the end-user finances the purchase of the leased goods by the technology company. Under this type of arrangement, both the asset and the associated liability is capitalised in the balance sheet. The interest garnered by each lease payment is regarded as an expense item in the profit and loss statement.

Another benefit of leasing is one that is not often considered: disposal. As of August 2004, disposal of electrical hardware is subject to stringent regulations under the EU’s Waste and Electrical and Electronic Equipment (WEEE) 2003 Directive. Building an environmental disposal strategy of reusing or recycling into IT purchasing is now essential for all businesses wishing to operate within the law. Under the regulations, all Irish businesses are now
responsible for ensuring that redundant electrical equipment is disposed of in an ‘environmentally friendly manner.’ The going rate for disposal rates is now nearing €900 per tonne. However, the disposal of leased electrical hardware is not the responsibility of the
end user.

The bottom line
Dublin-based Lease-It specialises in arranging leasing finance for companies interested in arranging tax-efficient forms of financing capital equipment. Most of the bigger finance companies have noted a dramatic percentage market increase in leasing, notes Paul Little,
independent leasing broker at the firm. ‘Formerly in Ireland, the view with leasing was that if you can’t afford to buy it outright, you couldn’t get it. But businesses are now looking at the net cost of the asset whereas the previous tendency was to look at how much it cost per month,’ he says.
‘Effectively, what you are doing with a lease is paying for the technology as you use it while also getting the best tax relief on the asset. Leasing means that you keep the asset from hitting your balance sheet, even into a secondary term. This results in the best value for money, and an acquisition lease allows you take title of the asset at the end of the agreed period.’ Personal computing packages starting at EUR*55 per user, per month are currently being
offered to small and medium-sized businesses by IBM Desktop Management Services. This price (€660 per year) compares favourably to estimates from analyst company Meta Group, who have calculated average desktop maintenance at between $2,000 and $5,000 a year.

The potential savings of a lease such as that offered by IBM averages over €1,000 a year per personal computer on a flexible, pay-per-seat service that includes hardware, software, services and financing. Since it has been estimated that approximately 80 per cent of the total cost of owning a desktop personal computer is incurred in ongoing PC administration, such a lease is ideal for small and medium-sized businesses looking to operate more efficiently. It
also allows SMEs to lower their total cost of ownership without upfront capital investment, improving security, increasing end-user productivity and gaining more predictability in budgeting forecasts.

CASE STUDY: Predictive Maintenance
Family-run Predictive Maintenance Limited, which carries out vibration analysis on plant machinery to find any problems that may arise, recently opted to lease new analysis equipment.
‘The technology that we are leasing is a PC-linked predictive tool called Minilab which is used to pre-empt machine failure by analysing particles in oil that can cause poor lubrication and abrasiveness in machinery,’ says Tony Mc Cormack, predictive maintenance director

‘Minilab is an add-on to what we are already doing and the reason why we went for a lease was simply value of the unit. Following a chat with our accountant, we realised that it would be against the rules to write a capital purchase like this off against tax in the first year,’ explains Mc Cormack. ‘He suggested leasing as an option and from there we organised it within a couple of days. From our point of view, leasing the technology made much more sense and has helped us manage our cash flow; we can write off our leasing costs as they fall due.’

Leasing: the Revenue lowdown
A company that leases equipment is allowed a deduction by Revenue for lease payments in calculating profits for tax purposes. All lease payments, including up-front payments, are spread evenly over the expected period of the lease.

With equipment leasing, repayments are wholly allowable against taxable income. This compares to a tax regime with outright purchase of IT equipment where capital allowances are claimed at 12.5 per cent per annum.

Revenue will ‘generally accept’ that payments may be spread over the primary period of the lease, where the primary period is standard for the type of asset in question and it is not clear at the start of the lease that the asset will be leased for a longer period. For example, where there is a primary period of, say, four years (which is standard for the type of asset), and the lessee does not plan to opt to lease the asset beyond that time, lease payments should be
spread over four years.

Most finance leases operate for a primary period during which the taxpayer effectively pays for the asset. At the end of the primary period, the lessee has the option to extend the lease for a further period. In practice, the primary period should not be less than three years, according to Revenue. Additionally, when a lease-holder purchases the leased asset, Capital Allowances can be claimed on the cost of the asset — market value at the date the lease ends — from the time the asset is purchased

Bang for your Buck
So to buy or not to buy? Smart Company went looking for a standard notebook that would plug easily into a corporate network while also handling the demands of multimedia presentations.

Following a trawl of online and offline offers from within Ireland, it transpired that it is cheaper to buy a machine with a one-off payment. As one representative from a leasing agency said, ‘it is definitely cheaper to buy’ a laptop rather than lease for the 365-day period chosen.

However, cash is your most valuable asset and tying it up in large purchases may be detrimental to cash flow. This can make a big difference to the books if you are buying for a whole department or company. But you may be locked into a long lease period before the possibility of upgrading or trading arises and may end up paying for a laptop that is not in use.

We also found that at the end of some leases, the title of the goods passes on to the leasing agency. This is part of the lease process for tax purposes. Some companies will then sell the laptop to you for a nominal sum.

So, when factors such as obsolescence, technical support, upgrades and tax are added in over a longer time period, it can make more sense to lease rather than to buy outright.

01/11/04

Read More: Hardware & Equipment