A finance lease is divided into Primary and Secondary Periods. In the Primary Period the lessee (the Hirer) pays rentals based on the amount financed plus interest. At the end of the Primary Period the lessee can dispose of the goods acting as an agent for the lessor (the Finance Company). The lessee normally benefits from a rebate of rentals (based on the sale proceeds) i.e. when the equipment is sold the lessee will get most of the sale proceeds. Some finance companies will give the full 100% rebate of sale proceeds whilst others may retain a small percentage.
If the lessee wishes to continue to use the equipment after the end of the Primary Period, the option exists to extend the lease into the Secondary Period. Annual Secondary Period Rentals (SPR) are paid each year the equipment is retained by the lessee. The SPR is usually 1% of the original cost but, like the Rebate of Sale Proceeds it varies from one finance company to another.
All the rentals paid (including any deposit paid or part exchange that form part of the deal, which become the initial rental) are normally fully allowable as a business expense in the year that they are paid. VAT is paid on each rental as it falls due.
The machine must be comprehensively insured by the lessee.