PRODUCTIVITY AND EFFICIENCY ABC

Get a clearer picture of equipment leasing

Louise Hamilton, head of NHS sales and marketing at Singers Healthcare Finance, argues that leasing offers NHS trusts a flexible financing solution.
he NHS is under more financial and operational pressure than ever before, with trusts needing to continue to deliver a first rate service to patients whilst making huge efficiency savings. Against the backdrop of diminishing resources, leasing offers a genuine alternative to capital. Leasing of medical equipment is experiencing a significant surge in demand. Last year the number of NHS leasing tenders rose by 28% from 219 to 280, and the value of equipment leased soared by 68%. Here we provide a brief overview of leasing and how it offers a flexible financing solution for NHS Trusts. Leasing Your Questions Answered 1. Why did NHS trusts start leasing? The Governments Private Finance Initiative (PFI) in May 1993 led to the introduction of leasing to finance equipment in 1996. 2. What is a lease? A lease is a contract between a Lessor (owner) and the Lessee (user) for the hire of a specific asset. The Lessor retains ownership of the asset but grants the right to use the asset to the Lessee, for an agreed period of time, in return for the payment of fixed rentals. 3. Are there different types of lease? Yes, there are two types of lease which trusts can use: a. Operating lease most commonly used by the NHS, this lease type is a contract where the Lessee agrees to pay the rental (carrying VAT at current rate) in respect of using the asset, over an agreed period of time. The rentals the Lessee pays do not fully cover the cost of the asset and the Lessor is left with an investment (or residual value) at the end of the lease. At this point, the Lessee can return the asset to the Lessor or negotiate extension rentals for continued usage of the asset. 6. How is the residual value calculated? The residual value is calculated by the Lessor and is based on various factors: - Manufacturer/quality of equipment - Anticipated usage - Level of technology - Resale market for equipment type 7. What can be leased? Virtually any moveable item can be leased. Limited building work can be included within the lease although the residual value will only be calculated on the tangible asset. 8. When and how are the rentals paid? The normal repayment terms are either quarterly or annual payments in advance. However, subject to credit approval, Lessees can request to pay in arrears.

b. Finance lease this lease type is similar to an operating lease but the rentals pay back the full cost of the asset and the cost of the borrowing. Once the primary lease period ends, the Lessor has no investment in the asset and, if the Lessee wishes to continue using the asset, they may do so by paying peppercorn or secondary rentals. 4. How do leasing charges work? Operating lease charges are a revenue (running costs) item; they are outside the NHS Capital Accounting Requirements. They are chargeable direct to revenue budgets, without the need for anything other than ordinary budget authorisation and approval, in accordance with normal purchasing procedures. 5. Who owns the asset? The Lessor owns the equipment for the life of the contract.

9. What happens to the VAT? The Lessor pays the VAT on purchase of the asset and then reclaims the VAT from HMRC. Rentals are calculated on the asset cost net of VAT. VAT is charged on rentals unless these are paid for with charitable monies which can be deemed exempt from VAT. 10. Are leasing contracts offered for tender? If the asset cost exceeds sterling equivalent to 125,000.00, then the leasing contract must be put out to tender via leasing frameworks. Under that figure, a trust follows its own standing financial instructions in respect of tender procedures. 11. Can maintenance be added to the lease? Yes, the Lessor acts as a billing and collection agent for the supplier, collecting the pre-agreed service payments alongside the lease rentals and passing to the maintenance contractor. 12. What are the features and benefits of an operating lease? - Fixed rentals - Minimises risk of asset obsolescence to the Lessee and easy to upgrade lease with new/ additional equipment - Flexible repayments - Improved cashflow - Simple accounting - Flexible usage - No disposal issues - Access to up-to-date technology without major capital expenditure If you feel that leasing could work as one of your procurement options, and wish to discuss how your trust could benefit from the above, please contact our dedicated team. FOR MORE INFORMATION T: 0800 032 3638 national health executive May/Jun 12 | 71