Leasing is a contract between the leasing company, the “lessor”,
and the customer, the “lessee”; The leasing company buys
and owns the asset that the lessee requires. The customer hires the
asset from the leasing company and pays a rental over a pre-determined
period for the use of the asset.
The leasing company can sometimes claim capital allowances on the assets. These
benefits are usually passed onto the lessee in the form of reduced repayments. There
are two types of lease :Finance Lease and Operating Lease
Under a finance lease the rental covers virtually all of the costs of the asset,
therefore the value of the rental is equal to or greater than 90% of the cost
of the asset. The leasing company claims written down allowances, whilst the
customer can claim both tax relief and VAT on rentals paid.
The lease will not run for the full life of the asset and the lessee will not
be liable for its full value The lessor or the original manufacturer or supplier
will assume the residual risk. This type of lease will normally only be used
when the asset has a probable resale value; for instance aircraft or vehicles.
The most common form of operating lease is known as contract hire. Essentially
this gains the customer the use of the asset together with added services. A
very common example of an asset on contract hire would be a fleet of vehicles.
A residual value is the value of the asset at the end of the lease term. Residual
values play an important role in an operating lease that is used in conjunction
with equipment that retains value at the end of the contract period. The residual
value will be left out of the rental calculation. Either the leasing company
or a third party will take the risk that the asset will not be worth the amount
of the residual value at the end of the lease.
Under a balloon rental payments are made over the period of the lease, sometimes
a larger payment or lump sum called a balloon payment is made at the beginning
or end of the lease period. Often the customer would pay a balloon payment on
the last day of their lease.
A lease purchase is essentially the same as HP; the main difference is in the
terms and structure of repayments. Some finance companies differentiate Lease
Purchase from Hire Purchase by using it where the customer wishes to defer payment
of a substantial part of the asset cost until the end of the agreement.