Finance lease vs operating lease in Ireland: tax, VAT and accounts

A finance lease is a long lease in which the rentals cover all or most of the asset’s cost, plus the finance company’s return. Your company usually maintains the asset, and the lease typically runs for most of its useful life. Legal title normally stays with the finance company, so your company does not automatically own the asset at the end. That is the main difference from hire purchase, where ownership passes once the final payment is made.

Finance leases are common for production machinery, plant, commercial vehiclesA vehicle, such as a van or truck, that Revenue does not treat as a passenger car for VAT purposes. and fit-outs that a company expects to use for many years. Because your company carries most of the risk, the rentals are usually fixed for the primary period, and the finance company’s return is built into them in the same way as interest on a loan.

An operating lease is a rental for a shorter period than the asset’s working life. The rentals do not cover the full cost, because the finance company expects to sell or re-lease the asset at the end and takes the risk on its residual value. Maintenance is sometimes included. Operating leases are common for vehicles, IT and equipment that dates quickly.

• Risk and reward: finance lease, mostly with your company; operating lease, mostly with the finance company.
• Term: finance lease, most of the asset’s useful life; operating lease, a shorter period.
• Rentals: finance lease, cover most of the asset’s cost; operating lease, cover only part of it.
• Residual valueThe estimated value of an asset at the end of a lease or finance agreement. risk: finance lease, usually your company; operating lease, the finance company.
• Maintenance: finance lease, usually your company; operating lease, sometimes included.
• End of term: finance lease, often a secondary rental period or a sale with a share of proceeds; operating lease, return, extend or upgrade.
• Ownership: neither transfers legal title automatically. If you want to own the asset, look at hire purchase.

Generally the lessor. For tax purposes, the finance company owns the asset, so it claims the wear and tear allowances, and your company deducts the lease rentals as a trading expense. Revenue’s guidance on leasing says lease payments are generally spread evenly over the lease term under section 76D of the Taxes Consolidation Act 1997, for both finance and operating lessees, and that the tax treatment of a lease is independent of the accounting treatment.

There is an important exception. Under section 299, where a lease is a “relevant lease”, the burden of wear and tear falls directly on the lessee and other conditions are met, the entitlement to capital allowancesTax relief that lets a company deduct the cost of plant and machinery used in its trade from its taxable profits over time instead of as a single expense. can move to the lessee instead. A relevant lease includes a finance lease, or an operating lease where the minimum payments are at least 80% of the asset’s fair value, the term is more than 65% of its remaining useful life, and there is a purchase option likely to be used. The rules are technical and include anti-avoidance provisions, so ask your accountant how your lease will be treated before you sign.

Revenue’s standard rate of capital allowances on plant and machinery is 12.5% a year over eight years. The Accelerated Capital Allowance for energy-efficient equipment is a separate question; our hire purchase vs leasing guide explains why it is generally not available on leased equipment.

On each rental. Revenue says the hire without an operator of any machine is chargeable to VATA tax charged on most goods and services supplied in Ireland, collected by VAT-registered businesses and paid to Revenue. at the standard rate, which is 23%. Certain plant hired with an operator, such as excavators and road rollers, is charged at the reduced rate. Leases, whether finance or operating, are generally treated as a hire of the asset, so VAT follows the rentals.

That is different from hire purchase. Revenue treats hire purchase as a supply of goods, so VAT on the full value is accounted for when the asset is handed over, and the finance charges are exempt. A VAT-registered company can normally reclaim VAT on business assets, subject to the usual rules, but under HP it needs the cash first. Cars have special VAT restrictions; see our guide to commercial vehicle finance, VAT and BIK.

This is the biggest change for Irish companies in years. The Financial Reporting Council (FRC), which sets UK and Irish accounting standards, issued amendments to FRS 102 in March 2024 following its periodic review. Most of them, including the new lease rules, are effective for accounting periods beginning on or after 1 January 2026.

• Lessees: the finance lease and operating lease distinction is removed for lessees. Your company recognises a right-of-use assetThe asset a lessee records on its balance sheet for the right to use a leased item over the lease term, alongside a matching lease liability. and a lease liability on the balance sheet for most leases.
• Exemptions: leases of less than 12 months and leases of low-value assets can stay off the balance sheet. The FRC says its low-value exemption is broader than under IFRS 16, provided the most economically significant leases are recognised.
• Profit and loss: rental expense is replaced by depreciation and interest. Interest is front-loaded, so total expense is higher in the early years of a lease.
• Key ratios: the FRC notes that gearing, interest cover, the current ratio and EBITDAEarnings before interest, tax, depreciation and amortisation. may change, and that loan covenants could be affected.
• Lessors: accounting by lessors remains largely unchanged, so finance companies still classify leases as finance or operating.
• Transition: a modified retrospective approach, so prior-year comparatives are not restated.
• Micro-entities: Grant Thornton Ireland notes that the revised lease requirements do not apply to micro-entities preparing accounts under FRS 105.

For a company with a 31 December year end, the first affected accounts are those for the year ending 31 December 2026. Companies reporting under IFRS, such as listed groups, already apply IFRS 16, which has a similar on-balance-sheet model for lessees. If your company has loan covenants based on EBITDA or gearing, talk to your accountant and lender now about how the change will be treated.

So, in your accounts, the finance versus operating label now matters much less for a lessee. It still matters commercially, for risk and end-of-term options, and for tax under section 299.

Finance lease

• Secondary period: many finance leases let you keep using the asset for a low annual rental.
• Sale to a third party: the finance company may sell the asset, often with a share of the proceeds passed back to your company as a rental rebate, depending on the agreement.
• Return: you hand the asset back, in the condition the agreement requires.

Operating lease

• Return the asset, subject to condition and usage terms, such as hours run or mileage.
• Extend the lease, often at a lower rental.
• Upgrade to a newer model under a new lease.

Read the return conditions carefully. Excess wear or usage charges are a common surprise at the end of an operating lease. Before the end date, compare the cost of extending with the cost of a new lease or buying a replacement outright, and give any notice the agreement requires, as some leases roll on automatically if you do nothing.

A finance lease may suit you if

• You will use the asset for most of its working life.
• You want to spread VAT across rentals rather than pay it upfront.
• You are comfortable maintaining the asset yourself.

An operating lease may suit you if

• The asset dates quickly, such as IT, some vehicles or technology-heavy equipment.
• You want predictable costs, possibly with maintenance included.
• You do not want the risk of what the asset will be worth at the end.

If ownership or capital allowances matter most, compare both with hire purchase. See equipment leasing for more on how leasing works in practice.

1. Ask whether the finance company treats the agreement as a finance lease or an operating lease, and why.
2. Get the full rental schedule, including any advance rentals, fees and VAT, and the total payable.
3. Read the end-of-term options and any return conditions, such as hours, mileage or wear standards.
4. Check who is responsible for maintenance and repairs.
5. Ask your accountant how the lease will appear in your accounts under the revised FRS 102, and whether section 299 could apply for tax.
6. Check whether the new lease liability affects any covenants in your existing loan agreements.
7. Ask whether a personal guaranteeA legally binding promise by a director or other individual to repay a company's debt if the company cannot. is required, and take independent legal advice if so.

Tell us what your company needs and we’ll tell you honestly whether our panel can help, or where to apply instead. We are paid commission by lenders. We do not charge your company a fee and never ask for payment upfront. Welcome Finance is a commercial finance broker, not a lender, and is not regulated by the Central Bank of IrelandIreland's financial regulator and part of the Eurosystem.. We work only with companies registered in Ireland (LTD, DACA type of Irish private company under Part 16 of the Companies Act 2014 that keeps an objects clause in its constitution, limiting what it can do, and uses the suffix DAC., PLCA company type under Part 17 of the Companies Act 2014. or ULCA company under Part 19 of the Companies Act 2014 whose members have unlimited liability for its debts.).