Modern pharmacies rely on equipment and technology to operate efficiently. From dispensing robots and automated medication systems to IT infrastructure, consultation room equipment and refrigeration units, investment in equipment is often essential.
When acquiring new assets, pharmacy owners broadly face two options: purchasing equipment outright or acquiring it through a lease arrangement. While both methods achieve the same operational outcome, the impact on cash flow can be significantly different.
Understanding these differences can help pharmacy owners make informed decisions that align with their business objectives and financial position.
Cash Flow Considerations
For most pharmacy owners, cash flow is one of the most important factors when deciding how to finance equipment purchases.
Buying Equipment Outright
Purchasing equipment outright requires a substantial upfront investment. For example, a pharmacy investing £50,000 in new dispensing technology funds the entire purchase price immediately, from existing cash reserves which reduces working capital.
Leasing Equipment
Leasing spreads the cost of an asset over a fixed term through regular monthly payments. Rather than paying £50,000 upfront, a pharmacy might pay a modest initial rental followed by fixed monthly payments over three to five years. This preserves working capital and provides predictable monthly repayments but will be more costly.
This can be particularly attractive for growing pharmacies that need to invest in technology while maintaining sufficient cash to meet day-to-day operating expenses.
Leasing Options
If you do not have the cash reserves, or don’t wish to use them, leasing is often the best option when purchasing equipment. Understanding the different types of leasing arrangements ensures that the financing structure aligns with the greater business objectives.
Hire Purchase
Hire purchase arrangements allow the cost of acquiring equipment to be spread whilst ultimately having ownership. The finance company purchases the asset on behalf of the pharmacy, which then repays the cost through regular instalments over a number of years. Hire purchase is a popular choice for equipment with an expected long lifespan.
Finance leases
Under this arrangement, a finance company purchases the equipment and leases it to the pharmacy for an agreed period. The pharmacy pays fixed monthly rentals and has exclusive use of the asset throughout the lease term. Unlike a HP agreement, legal ownership remains with the finance provider but the pharmacy assumes most of the risks and rewards associated with ownership. At the end of the lease term the pharmacy would typically have the option to hand the asset back, upgrade or pay a notional secondary period rental for continued use of the asset.
Finance leases are particularly suitable for high-value equipment that are expected to remain in use for a few years but will ultimately need replaced/upgraded at a regular cycle.
Operating leases
An operating lease is more comparable to renting equipment than financing a purchase. The lease term is generally shorter than the useful life of the asset, and ownership remains with the leasing company throughout the agreement.
At the end of the term, the equipment is typically returned, and a new lease taken for upgraded newer equipment. This makes operating leases well suited to assets that can become obsolete relatively quickly, such as computer hardware.
The monthly costs are often lower than purchase-based finance arrangements, as there is no ownership interest in the equipment.
Tax Considerations
The tax treatment of leased assets differs from equipment purchased outright, and this can influence the overall cost of investment.
Tax Treatment of Purchased Equipment
When equipment is purchased outright, the expenditure is typically treated as capital. Pharmacies may be able to claim capital allowances, allowing tax relief on qualifying expenditure. In many cases, the Annual Investment Allowance (AIA) enables businesses to deduct the full cost of qualifying plant and machinery in the year of purchase, subject to the annual limit of £1 million.
Where AIA is available, a pharmacy purchasing qualifying equipment may obtain tax relief relatively quickly despite the expenditure being capital in nature. Where the equipment is brand new, Limited Companies can enjoy full expensing of capital expenditure in addition to the AIA.
The tax relief on Hire Purchase arrangements typically follow the same treatment as if the equipment was purchased outright, with AIA and full expensing available where relevant.
Tax Treatment of Leased Equipment
For operating leases, rental payments are generally treated as revenue expenditure and deducted from taxable profits as they are incurred. This creates a straightforward and predictable tax treatment, with relief obtained throughout the lease term rather than through capital allowance claims.
Finance leases are capitalised on the balance sheet and depreciated over the term of the lease. Unlike assets under ownership, the depreciation of a finance lease is not added back in the corporation tax computation giving an equivalent position of the monthly rental for tax relief.
The total tax relief available over the life of an asset is often similar regardless of whether the asset is purchased or leased. The key difference is usually the timing of that relief, which is summarised below:
| Cash Purchase | Hire Purchase | Finance Lease | Operating Lease | |
|---|---|---|---|---|
| Initial Outlay | £50,000 | £5,000 - £10,000 | Up to £5,000 | Up to £5,000 |
| Monthly payments | No | Yes | Yes | Yes |
| Ownership | Yes | End of Agreement | Option | No |
| Corporation Tax Relief | AIA - £50,000 in year of addition | AIA - £50,000 in year of addition | Over Life of Lease | Over Life of Lease |
Which Option is Best?
There is no universal answer. The most suitable option depends on the pharmacy's financial position, growth plans and tax circumstances.
Before proceeding with a major equipment acquisition, pharmacies should model the scenarios and consider the wider strategic objectives of the business. A detailed review with your accountant can help you to calculate the overall cost and ensure that the correct option is chosen for your business.
If you would like help with your strategic tax planning, contact us at tax@thomsoncooper.com or call on 01383 628800 or 0131 226 2233.
Lewis Hunter CA, CTA
Lewis is an Accounts Manager with experience in the preparation of annual accounts, corporation and personal tax. He manages a portfolio of owner-managed businesses
