What is an operating lease?

Definition of an operating lease

An operating lease is a is a lease where you rent an asset, rather than buying it.

If you’re buying the asset, or if the terms of the lease are that you’re effectively taking on the risks and rewards of owning the asset while the lease runs, the lease will be a finance lease rather than an operating lease.

Example of an operating lease

If you hire a car, that’s an operating lease, because you’re not buying the car, nor are you taking on the risks and rewards of owning it while you’re hiring it. For example, it’s the car hire company’s responsibility to insure the car and make sure it’s passed its MOT. If the car was sold it would be the hire company that would get to keep the cash.

Be careful of how much VAT you can reclaim on payments you make under an operating lease - for example, if you are leasing a car, you can only reclaim 50% of the VAT on the lease payments. To reclaim this VAT in FreeAgent, choose “Amount” on the VAT drop-down and put in half the VAT as per the payment agreement.

Got questions? Ask Emily!

FreeAgent's Chief Accountant Emily Coltman is available to answer your questions in the comments.

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