This is designed for hirers who want a machine without the “risks and rewards of ownership”, in particular an interest in the sale proceeds. The hirer pays rentals based on the equipment cost less a projected future disposal value. The lessor estimates and underwrites the residual value and, as the owner, takes full risk of this.
The period of hire and rentals are fixed in advance, normally between 24 and 60 months with the equipment being returned to the lessor at the end of the agreement.
Under a simple operating lease the lessee is responsible for all operating costs including servicing, maintenance, insurance and repairs, since the machine must be returned to the lessor at the end of the agreement in full working order and in a condition specified at the outset.
Rentals are normally fully allowable against taxable income as a business expense and VAT is paid on each rental as it falls due. Return and operating conditions are linked to an agreed area covered by a machine (e.g. maximum number of hours etc).