Should You Buy That New Equipment or Lease It? The Accounting View

Introduction

For construction companies and SMEs, the decision to buy or lease new equipment isn’t just about convenience, it’s about cash flow, tax efficiency, and long-term profitability. The right choice can free up working capital, lower tax bills, and boost return on investment. The wrong choice can drain cash, tie you into costly contracts, and limit growth.

At Jones Financial Accounts (JFA), we help business leaders make these financial calls with clarity, blending plain-English advice with CFO-level insight.

Why It Matters for Businesses

The buy vs lease decision affects cash flow, tax, flexibility, and borrowing capacity:

• Cash flow impact: Buying a £200,000 excavator outright ties up cash that could be used for wages or project delivery. Leasing spreads the cost into manageable monthly payments, preserving liquidity.

• Tax impact: A purchased asset can qualify for the Annual Investment Allowance (AIA), meaning you may deduct the full cost from taxable profits in year one. Leasing, on the other hand, offers smaller, ongoing expense deductions.

• Flexibility & technology: Leasing lets you upgrade more easily. For industries where tech evolves quickly (e.g., IT systems, specialist machinery), leasing avoids being stuck with obsolete kit.

• Balance sheet strength: Buying adds an asset, but also may add debt if financed. Leasing keeps debt lower, but can inflate your expense base.

Example: A construction firm buys scaffolding outright using a bank loan. They benefit from capital allowances but weaken short-term cash flow. Another firm leases scaffolding, their balance sheet stays lighter, but after five years they’ve spent more than the original asset price.

🚐 Vans (5 Vans @ £100k total)

Factor	Buy	Lease	Which Wins?
Cash flow	£100k outflow up front (or HP finance)	£2k/month (£120k over 5 years)	Lease (smoother on cash)
Tax	Full £100k AIA deduction in year 1	£120k deducted gradually as lease expense	Buy (bigger upfront tax relief)
Total cost (5 yrs)	£100k (minus resale value, say £30k → net £70k)	£120k (no asset)	Buy (cheaper long term)
Balance sheet	Asset added, boosts equity	No asset, lighter balance sheet	Buy (stronger externally)

👉 Best for long-term cost: Buying, because resale value offsets cost.

👉 Best for cash flow: Leasing, spreads the hit.

🏗️ Plant Machinery (Excavator @ £200k)

Factor	Buy	Lease	Which Wins?
Cash flow	£200k up front (or HP repayments)	£4k/month (£240k over 5 years)	Lease (protects cash)
Tax	£200k AIA deduction upfront	£240k deducted gradually	Buy (larger upfront saving)
Total cost (5 yrs)	£200k (minus resale value, say £80k → net £120k)	£240k (no asset)	Buy (cheaper by £120k net)
Balance sheet	Asset valued at £200k	No asset	Buy (shows strength)

👉 Best for long-term cost: Buying (net £120k vs £240k).

👉 Best for cash flow flexibility: Leasing.

🏢 Warehouse (Office/Storage) – 10-Year Comparison

Factor	Buy	Lease (Rent)	Which Wins?
Cash Flow	£500k upfront (or financed via loan)	£5k/month (£60k/year) = £600k/10 yrs	Lease (lower short-term outlay)
Tax Treatment	Limited relief – fixtures only qualify (no full AIA)	Full £60k/year deductible as rent expense	Lease (better tax relief annually)
Total 10-Year Cost	£500k (ownership retained, no ongoing rent)	£600k (pure expense, no asset)	Buy (cheaper long term)
Asset Value (10 yrs)	Property likely appreciates: ~£610k (2% annual growth assumed)	No ownership, no capital gain	Buy (wealth creation)
Balance Sheet Impact	Stronger equity, fixed asset added	No asset, ongoing liability	Buy (stronger position)

👉 Best for long-term position: Buying, as you own an appreciating asset.

👉 Best for short-term cash/tax relief: Leasing/renting.

Overall Insight

• Vans & Plant: Buying wins for total cost if you can afford the upfront cash or finance, resale value makes ownership cheaper. Leasing only wins if cash flow is tight.

• Warehouse: Renting is cheaper in the first 5 years, but buying is much more beneficial long-term because you own a tangible appreciating asset.

Common Mistakes (and the Consequences)

• Only looking at headline cost: Leasing “£1,500/month” sounds cheap, but over five years you may spend double the purchase price.

• Not considering tax: Missing out on AIA or misclassifying leases can mean higher tax bills. HMRC can reclassify errors, leaving you with unexpected liabilities.

• Ignoring resale value: Buying equipment that holds resale value (like plant machinery) can offset upfront costs. Leasing offers no resale upside.

• Overstretching cash: Businesses that buy outright without forecasting cash flow risk running out of working capital, leading to missed supplier payments or delayed wages.

Misconceptions About Buying vs Leasing

• “Leasing is always more expensive.” Not necessarily. Once you add loan interest, maintenance, and resale risks, leasing can be cost-effective, especially for short-lived or tech-heavy assets.

  
  

• “Buying is always better because you own the asset.” Ownership isn’t always an advantage. If the equipment depreciates rapidly or becomes outdated, owning is a liability.

  
  

• “Leasing payments don’t affect borrowing.” False. Lenders consider lease commitments when assessing credit, even if they’re not shown as debt on your balance sheet.

Key Takeaways

• Buying gives ownership and tax allowances but drains cash upfront.

• Leasing preserves liquidity and flexibility but often costs more long-term.

• Tax treatment differs, AIA favours purchases, leases favour steady deductions.

• Real-world impact varies: vans, machinery, and buildings each have different outcomes.

• Professional advice ensures you avoid costly mistakes and make the most of both options.

Wrapping up today's insights, tomorrow we simplify another accounting challenge