»Ê¹ÚÌåÓýapp

For the small sums in the examples at BLM30040 the lessor’s timing gains are trivial. But consider the implications for an investment in kit (perhaps a large ship or aircraft) costing £100 million instead of £1,000. Both lessor and lender would then pay tax of £700,000 on the deals if all the figures were adjusted proportionately. But the ‘net present value� of the tax repayments and payments for each are, assuming (a) a 10% interest rate and (b) a 5% interest rate:

Ìý	(a) 10% interest	(b) 5% interest
Finance lessor	£213,000	£417,000
Lender	£538,000	£594,000

In other words, because the lessor has the use of the upfront tax repayment and pays its tax later, the ‘net present value� (‘real� cost) to it of the tax is substantially less than it is for the bank. In case (a) the real cost for finance lessor is £325,000 less than it is for the bank (£538,000 less £213,000). In case (b) the saving is £177,000.

»Ê¹ÚÌåÓýappse timing gains are significant when you consider that, on a £100m loan over five years, the pre-tax commercial profit is only £700,000 for both lessor and lender. »Ê¹ÚÌåÓýapp advantage of finance leasing over lending is therefore found by comparing the ‘net present valueâ€� of all the cash flows (positive and negative) on a loan with all the cash flows (positive and negative) on an equivalent finance lease.

»Ê¹ÚÌåÓýapp advantage varies with the length of the primary period, the profile of lease rental payments (level, front-loaded or back-loaded), the rate of tax, the rate of tax relief on the capital expenditure and the rate of interest. See BLM30405 for an explanation of the meaning of ‘net present valueâ€�.