The right leasing option for your school

Equipment leasing is a form of asset finance, the other most common form being hire purchase. It is an increasingly important method of financing capital‑intensive equipment. An equipment lease is an agreement to hire, but not to buy outright, an item of equipment. If the lease agreement contains an optional clause providing the hirer with a right to purchase the equipment at the end of the term, it is a hire purchase agreement.
   
Where the customer chooses to lease, the supplier often provides the lease through an asset finance subsidiary company, which becomes the owner. Some suppliers may introduce the customer to a third party lessor, often the asset finance arm of a bank. However, it is common for large equipment manufacturers to have their own asset finance division with the business of that division not necessarily being limited to financing the manufacturer’s own products.
   
Any type of equipment can be leased but typically it is a single expensive item such as a photocopier, or several items which operate together as a system, such as a telephone switchboard and the handsets for each of the extensions connected. There may be ancillary items such as a voicemail system. Equipment may be new or second-hand, but with a working life of several years. 

Main Terms
The parties to an equipment lease are the owner and the hirer, sometimes referred to as the lessor and the lessee. In return for payment of the hire charge (the rent) the lessor, as the equipment owner, permits the lessee to use the items hired for the term (the duration) of the Lease. Typical customer (lessee) obligations in such a lease are to pay rental instalments, to insure the equipment, maintain and operate it in accordance with the manufacturer’s recommendations, and to return it in good condition when the lease ends.
   
When the lease ends, the customer can either return the equipment or extend the lease. Hire charges may be lower than paid during the original lease term. Under a hire purchase agreement the customer can arrange to buy (bearing in mind the item is no longer new).
 
Operating & finance leases
Operating leases are useful if the lessee needs the equipment to be updated or replaced frequently as: they run for shorter, specific periods shorter than the full economic life of the asset; the lessee is not liable for financing of the asset’s full value; the lessee has use of the equipment, but not full ownership; and because the residual value belongs to the lessor. In reality the depreciation in value over the hire period is suffered by the lessor, since the lessor is the owner.
   
A common example is a contract hire agreement for a fleet of motor vehicles – most fleet vehicles are replaced within two or three years. The lessor may rent the vehicles or other items to a succession of lessees, but the lessor can only claim the writing-down allowances against taxable profits (under the Capital Allowances  Act 2001) while ownership is retained.
   
In contrast, a finance lease will be for a specific longer period considered to be the full economic life of the asset. The lessor can claim the writing-down allowances and can also pass the benefit of these to the customer in the form reduced rental payments.
   
In summary, the distinction in accounting treatment under IAS 17 is that for an operating lease, the customer lessee records only expenses, not a balance sheet item. For a finance lease, it records both expenses and the asset on its balance sheet. 
   
However, for schools, government policy treats an operating lease as a hiring agreement, but a finance lease is treated as a borrowing agreement for capital finance.

Advantages of Leasing Equipment
Leasing, instead of purchasing, is a means of spreading the cost of the equipment over a period of time, avoiding the need to pay the full purchase price as cash upfront. The certainty of fixed regular payments which can be made from a school’s devolved revenue budget allow cash reserves to be preserved. Leasing also offers some flexibility with the repayment period matched to the useful life of the equipment, and allows equipment to be upgraded without the need for capital expenditure. Leasing packages can include servicing and other maintenance and may be offered with supplies of consumables, for example paper for photocopiers. These additional benefits are an inclusive-price purchase of goods and/or services ancillary to the equipment lease. The value for money of such convenient arrangements should be investigated carefully, as should the fundamental choice of whether to buy or lease.

Finance Lease restrictions
For both maintained schools and academies, the use of finance leases continues to be prohibited without the consent of the Secretary of State for Education (SSE). School business managers will be familiar with this requirement under their own local authority’s schools financial manual or the Academies Financial Handbook.
   
Although no specific prohibition against finance leases is contained in the Education Act 2002 or the School Finance Regulations for maintained schools, nor under the Academies Act 2010 for academies, finance leases (as distinct from operating leases) are identified in the Prudential Code for Capital Finance in Local Authorities as “credit arrangements” for capital finance. Credit in this context means borrowing, and borrowing does require SSE consent under Schedule 1 of the Education Act 2002, and also under Academy Funding Agreements. 
   
In almost every case these requirements preclude use of finance leases in state schools, although some might argue that finance leases can offer better value for money than operating leases. This is the view of the Finance and Leasing Association, the trade body representing asset finance lessors, whose members would welcome a new opportunity for business.
   
Fee-paying independent schools should check whether their constitution (if a company, its memorandum and articles of association) empowers the school to borrow. Not all charities have a power to borrow.

How to lease well
Before obtaining quotations or conducting a tender procedure for equipment, the school or academy should conduct normal good practice pre-procurement steps as for any other procurement, such as: a pre-procurement review, identification of the school’s requirements; preparation of a statement of requirements in a form suitable for use as the specification for the invitation to tender; preparation of evaluation criteria; and careful consideration of the cost of leasing against the cost of an outright purchase, is the item in question suitable for an operating lease, will it need replacing frequently and what are the associated costs?
   
If you contemplate leasing, your risk assessment should include risks associated with entering into a leasing arrangement as opposed to an outright purchase. Before starting the tender stage, there is some useful guidance in the DfE/NASBM Tips for Successful Leasing in Schools, and some sensible precautions in the 12-point Checklist for Business Finance Customers appearing on the website of the Finance and Leasing Association.

Evaluation of Tenders
If packages with maintenance/servicing and other items have been offered, check that you are comparing like with like. Would separate purchase of consumables give better value? If so, ask the supplier to take this out of the package – a supplier is unlikely to risk losing the main equipment sale or lease over the supply of consumables.
   
Understand what is provided and who provides each element, including the leasing arrangements. If the equipment lessor is not part of the supplier, take up customer references for both.
   
Beware cashbacks, subsidised rentals and other incentives. If offered, value for money may be suspect. Also, watch out for “escalator clauses” when evaluating price: these stipulate automatic price increases and are sometimes in the small print of the supplier’s terms and conditions.

Before you Sign
Prepare for “sharp practice” supplier sales techniques such as last-minute disclosure that the supplier will not be the financier and the financier’s required leasing period is significantly longer than the supplier’s minimum hire period.    
   
Check that the school’s obligations on termination are clear – it is likely the equipment will need to be returned to the lessor at the customer’s expense; items damaged or in disrepair may be charged to the customer.
   
Before signing, check that the contract identifies the equipment with at least model numbers and preferably serial numbers so each item can be identified individually. Similar items may be hired at different times by different contracts. If the need to terminate arises you need to be sure you are dealing with the right one. Finally, check the amount payable on early termination of the lease.

Further information
www.geldards.co.uk

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