Guidance

Leasing guidance for academy trusts

Updated 20 January 2025

Applies to England

Leasing allows trusts to:

• acquire equipment and make payments at regular intervals over the period it will be used
• avoid steep upfront purchase costs which would cause cashflow issues

The Department for Education (DfE), and the Finance & Leasing Association (FLA) have created this guide to highlight the factors to consider and processes to be followed when choosing to lease equipment, helping to ensure you are making the right choices for your academy trust.

The commissioning process

You must follow your trust’s normal commissioning process for equipment before considering any type of finance. This may involve:

• a pre-purchasing review to confirm the equipment required
• preparing the specification and evaluation criteria

The government’s buying for schools guidance for goods, works or services can be used to assess whether your existing commissioning process is sufficiently robust. We strongly recommend that you read this guidance before entering into any procurement of leases.

You should compare the cost of leasing against the cost of purchasing. Compare various quotes as the most competitive quotes for purchasing the equipment might come from a supplier that doesn’t offer leasing, or vice versa.

In addition, make sure you’re comparing like with like. This can include whether different equipment models have a similar level of functionality and whether some leasing options include extras like maintenance and supplies (see the ‘maintenance and supplies’ section).

Research the finance company

Some manufacturers may supply both equipment and finance, and many businesses offering leasing arrangements to trusts are equipment suppliers that offer finance through third party finance companies.

When dealing with an equipment supplier, check who the finance company will be. Those that are members of the FLA will be subject to FLA’s Business Finance Code which sets out standards for customer service, information and complaints procedures.

Understand the costs

Lease agreements generally require a school to make regular fixed payments over an agreed period of time, but there may be additional costs related to your use of the equipment.

Trusts should know the cumulative costs incurred by leasing (the annual charges multiplied by the number of lease years). This total cost should be the comparison for purchase costs.

Ensure that you understand all the potential costs and if these may change during the lease. For example, photocopiers may charge per copy, based on mono or colour, and there may be charges for ancillaries, such as staples and ink.

The minimum lease period

The minimum lease period is the shortest period that the school will have to make rental payments for equipment. It is fixed regardless of other factors, such as changes in technology or changes in the school’s needs.

Consider how long your trust tends to keep similar equipment or speak to other trusts leasing similar equipment to ensure that the minimum lease period is appropriate.

Maintenance and supplies

Ensure that you understand what you might need to do in each instance (for example, give notice that you will be returning the equipment). If switching suppliers, the new company must not clear any outstanding lease debt. The agreement is between the school and the original finance company. If the new company fails to pass on the settlement, the school could still be liable.

Check what options are available at the end of the lease period before signing the agreement. You should check:

• whether the maintenance or supply contract is a separate agreement to the lease – if it is, check whether the length of the two agreements is the same, and how much notice might be required to terminate each one
• what level of service you will get (for example, will there be regular maintenance visits and supply deliveries or will you need to request these when necessary)
• the maintenance or supply costs and if a similar level of service could be obtained from a different supplier at a lower cost
• what would happen if the company providing the maintenance or supplies went out of business, and how this might impact on your use of the equipment and lease payments
• if additional services or add-ons are to be provided as part of the lease – it would be beneficial to have these detailed within the lease agreement so that the school know what is needed, who will provide and at what cost (on increases during the lease period)

Upgrading equipment

Keeping the equipment you have until the end of the minimum lease period will almost always be cheaper than upgrading it before the end of the agreement. However, if your needs change and upgrade becomes necessary, speak with your current finance company as they will be able to provide you with details of the available options.

Upgrading your equipment will require settlement of the remaining balance on your existing agreement. You can do this by either paying off any outstanding rental payments up front, or by including these payments in a new lease along with the cost of the new equipment. If you opt for the latter, you will be paying capital and interest charges on both the new equipment and the balance of the old agreement carried forward. This is not seen as good practice due to the increased cost.

Bear in mind that the inclusion of a prior lease settlement figure in a new lease may mean the new lease is a finance lease. See the understanding the distinction between leases section for the differences between a finance lease and an operating lease.

When considering whether to upgrade, go through all the same checks you have done for a new lease agreement and seek appropriate advice.

Approval of lease agreements

Under previous arrangements academy trusts were free to take out operating leases without requiring Secretary of State approval. These were generally shorter-term agreements (compared with the asset’s economic life) where the asset was not judged to be acquired and was returned to the owner following the lease term.

However, academy trusts needed Secretary of State consent to enter into a finance lease (which are similar to acquiring assets through bank loans) under the funding agreement and academy trust handbook.

The implementation of International Financial Reporting Standard 16 (IFRS 16) from April 2024 sees all leases for maintained schools classified as finance leases, but it should be noted that under FRS102 for academy trusts, leases will still be identified as either operating or finance.

The department wants to continue to allow all schools to use leases to support their operation without additional administrative burdens. For maintained schools we have introduced new arrangements giving the Secretary of State’s prior consent for particular classes of leased asset.

For academy trusts, we are adopting a similar approach: academy trusts will continue to be allowed to enter into operating leases except for land and building leases. The Secretary of State will also grant prior consent for academy trusts to enter into finance leases for the types of items listed in changes to leasing agreements for academy trusts. These new arrangements apply from 1 September 2024.

Leases for items on this list will therefore not need to be submitted to the department for approval under the requirements of the funding agreement. For the avoidance of doubt, the prior consent does not replace the need to seek approval under all other aspects of the academy trust handbook requirements, for example related party transactions.

The list of permitted leases will be kept under review following implementation and this guidance updated accordingly. Leases not included on the list will need to be submitted for consent.

We believe these will largely be leases in relation to land and buildings and guidance on involving the Secretary of State in land transactions can is available at submit a school land transaction proposal.

Understanding the distinction between leases

For the lessee (the school), the lessor (funder) can structure a lease as either an operating or finance lease depending on the suitability of the asset and requirements of the school.

Understanding the main differences between a finance lease and an operating lease is essential:

Operating lease	Finance lease
Operating lease agreements typically have a shorter duration than the working life of the equipment. Under an operating lease, the leasing company (‘lessor’) retains substantially all of the risks and rewards of ownership, and it will also retain an investment in the equipment being leased known as the residual value (RV).	Finance lease agreements usually run for all, or a substantial proportion, of the equipment’s estimated working life. Under a finance lease the leasing company (‘lessor’) transfers substantially all of the risks and rewards of ownership of the equipment to the customer (‘lessee’).

The difference between a finance and operating lease depends on the substance of the transaction rather than the form of the contract. More information on the classification of leases can be found in the Financial Reporting Standard FRS 102. The key factors to consider are:

Consideration	Yes	No
Is the lease term for the major part of the economic life of the asset, even if title is not transferred?	Finance lease	Operating lease
At the inception of the lease does the net present value (NPV) of the minimum lease payments amount to at least substantially all of the fair value of the leased asset?	Finance lease	Operating lease
Are the leased assets of a specialised nature such that only the lessee can use them without major modifications being made?	Finance lease	Operating lease
If the lessee is entitled to cancel the lease, are the lessor’s losses associated with the cancellation borne by the lessee?	Finance lease	Operating lease
Does the lessee have the ability to continue to lease for a secondary period at a rent that is substantially lower than market rent?	Finance lease	Operating lease

Incentives such as cash-back, ‘free’ equipment or accessories, subsidised rentals, offers of the school being used for marketing purposes can sound very appealing in the short-term but you should focus of the terms of the lease agreement and the regular payments this will entail.

The FLA’s business finance code and guidance offers additional guidance on successful leasing.

If you have any queries, you can contact us through the DfE customer help portal.