Lease or buy a new coffee machine for my café — which works better for tax?

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Lease or buy a new coffee machine for my café — which works better for tax?

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Our main espresso machine is now about seven years old, it breaks down more often, and repair bills have risen sharply in the last year. My baristas also tell me that temperature control is no longer reliable, which affects the quality of our coffee. I need to replace it soon, and a supplier has offered two options: lease a new machine for about £150 a month over three years, with maintenance included, or buy a similar machine outright for about £5,500. I run the café through a limited company, and I want to understand which option works better for tax, as well as for cash flow.

If I lease, are the monthly payments simply an allowable business expense, and can I reclaim VAT on each payment in the usual way? Does it matter whether the lease is described as an operating lease or a finance lease, and what happens for tax if I have an option to buy the machine at the end of the term? I also need to know whether maintenance included in the lease changes anything, and whether early termination charges or a deposit would be treated differently from the regular payments.

If I buy instead, I understand that the machine is capital equipment rather than a day-to-day expense, so I would need to claim capital allowances. Could I claim the full cost in the year of purchase, or would it be spread over several years? Does it matter whether I buy new or second-hand, and does the timing of the purchase in relation to my year end make a difference? If I borrow to buy the machine, is the interest also allowable, and how is that recorded separately from the cost of the machine itself?

Beyond the tax treatment, I would welcome practical guidance on how to compare the two options fairly. The lease looks cheaper each month, but the total paid over three years is higher, and I would not own the machine at the end. Buying ties up cash now, but I would own an asset I could later sell.

Tagstax limited company capital allowances leasing

Answer 1

JJack David

There is no single winner: the right choice depends on cash flow, how long you expect to keep the machine, and the type of lease. Under a straightforward operating lease, where you hire the machine and return it, the monthly rentals are normally deductible as a revenue expense. If the company is VAT-registered, input VAT can normally be recovered on each rental as invoiced. Included maintenance does not change that treatment.

A lease with an option to buy, a long term, or payments covering most of the machine's value may be treated differently. In substance, it can be closer to a finance lease or hire purchase, where the company is treated as acquiring plant and machinery and claims capital allowances instead of deducting the full rentals. A refundable deposit is not normally an expense at all, while a non-refundable initial payment may be spread or treated as part of the capital cost. Early termination charges are usually revenue costs if they compensate for ending a hire arrangement, but check them against the contract wording.

If you buy the £5,500 machine outright, the price itself is not a day-to-day expense. It is capital expenditure on plant and machinery. For a limited company, it can often qualify for capital allowances, and the Annual Investment Allowance may allow the full cost in the year of purchase where the limit and conditions permit. If that allowance is not available in full, the balance normally goes into the main pool and is relieved through writing-down allowances over several years. Timing also matters: buying shortly before the year end can bring the allowance into that year, while buying just after it defers it. If you borrow to buy, only the interest element is normally a revenue expense; capital repayments simply reduce the loan.

For a fair comparison, use total cost over the same period, not just the monthly figure. Your lease is £150 a month for three years, or £5,400 in total, with maintenance included and no machine at the end. Buying costs £5,500 plus future servicing, but leaves you with an asset you may sell, and a later sale can give rise to a balancing charge or allowance. In short, leasing usually gives smoother deductions and protects cash flow, while buying can give faster relief through capital allowances and ownership.

Lease or buy a new coffee machine for my café — which works better for tax?

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