Vehicle Finance?

leannetonks

Hi,

My employers have recently got 3 vehicles on finance.

The finance documentation say it is a finance lease and they send us a vat invoice every month for the monthly installment. When I rang them to make enquiries they said that the vehicles will never be owned by the company because as we are reclaiming the input vat on the installments we must sell the vehicle at the end of the lease in order to charge output vat.

I am unsure how to treat this in the accounts (we use sage line 50), please could anyone give me some advice?

Many thanks
Leanne

Jan

Hi Leanne

I'd enter the invoice as a normal purchase invoice - set up the lease company as a supplier. Presume you are making bank payments by DD, just apply these to the supplier account each month as you would any BACS/Cheque payment.

As they say, your company are leasing the vans so their value will not go on the balance sheet. If they had been bought via a Hire Purchase agreement that is a different story.

Hope this helps

Poodle

Hi Leanne

Another option would be.

Set up a new nominal code in the 7700 area of the G/L called 'Motor Vehicle Leasing'

Then in the bank account that has the direct debit mangdate signed against it, set up a recurring VAT payment to this nominal code to coincide with the direct debit collection date.

You should receive a letter or some sort of notification from the leasing company to support the input VAT being claimed.

By processing this way you save keying in each month.

I do not understnd what the leasing company mean by you selling the vehicle at the end of the term. If you are not going to own it how can you do that?

Sometimes you have an option to buy at the end of a lease, (that could involve further input VAT being available to claim) and then you would put onto your balance sheet as Jan says.

You would only raise a sales invoice and pay outut VAT if you sold after taking ownership in this way.

Poodle

Fran

Hi Leanne

I have come across this a few times recently and it had me very confused at first. Basically it's all to do with SSAP 21, see:

http://www.frc.org.uk/asb/technical/standards/pub0391.html

Therefore, you need to open a loan account for the finance lease and put a journal through (for the net amount paid by the financing company). Say one vehicle is £10,000.00 net. The financing company will pay £10,000.00 plus VAT, they will reclaim the VAT, so the journal will be:

DR Fixed Assets 10,000
CR Finance Lease 10,000

Then, when the lease payments are made, claim the VAT on the payments and post the net amount to your finance lease account.

So essentially, it is treated as a hire purchase just with VAT on the repayments.

Hope this makes sense, but if you need any further information, inc tax treatment, just let me know.

Fran

marine

Hi Fran

Just so i've got this correct in my head - do you then depreciate the fixed asset and claim capital allowance's on the tax computation?

Thanks

Tim

peugeot

I'm not quite sure I agree with Fran's post - sorry!

The provisions of SSAP 21 deals with both finance leases (capital items) and operating leases (profit and loss items).

In the originator's post, they have said that the lessor has clearly stated that they will not own the vehicles. This suggests therefore that all the risks and rewards of ownership rests with the lessor and not the originator's company. In other words, the lessor will capitalise the vehicles (and claim the appropriate capital allowances) because they will derive an income from the vehicles in the form of rentals from the originator's company. Therefore, in the originator's company the payments will just be sent directly to the profit and loss account with the appropriate amount of input VAT being claimed.

Therefore I disagree with Fran's proposed treatment on the basis that if the company does not own the asset then they cannot therefore capitalise something which it does not own. However, I am a little confused with the fact that the agreement is apparently a 'finance lease' as stated in the original post (these are capitalised i.e. hire purchase agreements). I think if the finance company are sending monthly invoices, then this would suggest a contract hire agreement (an operating lease) which is a rental and therefore the payments sent to the P&L as under a finance lease monthly invoices are not normally sent.

Kind regards
Steve

Fran

Don't worry, i didn't agree with it at first, but it all makes more sense once the tax treatment is explained.

Say the van costs £10,000 which is capitalised, as previously mentioned. The depreciation then needs to be calculated over the length of the finance lease, so say three years it is 33.33%. This is then not added back in the tax computation (ie allowable for tax purposes) and capital allowances are not claimed on the cost of the leased asset.

Also, the difference between the cost of the asset and total finance lease repayments is put to finance lease charges, as an expense.

It has the same net effect on the profit and loss account, but obviously different treatment.

Fran

peugeot

Hi Fran,

If the risks and rewards of ownership lie with the lessor then it would fail to meet capitalisation criteria under SSAP 21 as the lease represents an 'operating lease'. You would need to look at the commercial reality of the arrangement rather than how it looks i.e. its legal form. Looking at it purely from a tax perspective is not viable - it has to be looked at from a financial reporting angle, so I would be inclined to agree with Jan and Poodle above in this respect.

In this case, the company has acquired 3 vans - on the face of it it's a capital transaction. However, from a commercial reality point of view, the company does not own the vans - they are merely 'renting' them so are unable to capitalise (in any circumstances - tax or otherwise).

Best wishes
Steve

peugeot

Hi Fran,

Sorry for the double post but I forgot to ask. I was wondering why you would allow depreciation for tax purposes and not claim capital allowances? The reason I ask is that if, for arguments sake, the vans were capitalised, then they would not be written off for tax purposes (by virtue of capital allowances) in the same way they were (presumably) being written off in the books i.e. 33% on a straight line basis. I also don't entirely agree that 3 year's worth of interest on the "capitalised lease" should hit the P&L in year 1.

In the tax comp the vans would receive first year allowances of 50% but then be written off on a 25% (20% 08 onwards) reducing balance basis (assuming a year end of on or before 31/3/08). In the books they would simply be being depreciated at 33% per annum. Hence my question.

I, personally, have never heard of depreciation being allowable for tax purposes (other than for amortisation of goodwill via concession from HMRC) so am intrigued to understand your reasoning as by initiating your treatment, there would be a disparity between the capital allowances claimed and the capital allowances that should have been claimed. You can't 'tailor' the writing off of the asset over the life of the "lease", you have to write it off in accordance with the Capital Allowances Act (at the very most you can reduce the capital allowances you claim in a year, thus essentially 'saving up' capital allowances for later years).

Regards
Steve

Bluewednesday

Having just covered all this in ACCA I fully agree with Peugeot, I'm just a bit perplexed as to why the lease is termed as a finance lease as it certainly appears to be an operating lease.

I also thought that with finance leases you claimed the whole VAT attributed to the asset in one go but with an operating lease you claimed the monthly VAT on the payments. Everything apart from the title of the documents say that this is an operating lease.

deanshepherd

Fran is correct about the tax treatment for finance leases.

The definition of a finance lease for tax purposes and accounting purposes is slightly different.

The depreciation of an asset capitalised under a finance lease for tax purposes is an allowable deduction. No add back. No capital allowances.

deanshepherd

Some explanation here.

peugeot

I agree with dean on the numbers and the tax - I would do the tax bit the other way round i.e. claim capital allowances/addback depreciation etc.

BUT (as always seems the case on this forum the post has gone off track)

was the tax treatment being asked about by the originator?

We've gone from an asset that isn't to its tax treatment which will never happen!!

deanshepherd

peugeot wrote:

I, personally, have never heard of depreciation being allowable for tax purposes

peugeot wrote:

I agree with dean on the numbers and the tax - I would do the tax bit the other way round i.e. claim capital allowances/addback depreciation etc.

I'm not sure we are in agreement! The only point I made is that with a finance lease (as oppose to a hire purchase agreement) you do not add back the depreciation. This seems to be in complete disagreement!

But getting back to the original post, I agree with Steve that this would not apply in this case anyway.

Remember to only claim back 50% of the VAT too..

peugeot

Hi Dean,

JUST to clarify:001_rolleyes:

This is what we do (in practice):

1.capitalise finance lease.
2. add back depreciation charges.
3. claim relevant capital allowances.
4. apply the level spread method to the interest (ie if only 6 payments in year then only 6/12 of the interest in the accs).

Working the numbers out there's not much difference. It's something we've done for 20+ years and it has never been challenged, so I suppose technically both ways are correct. I was originally in disagreement re allowing depreciation (even in ACCA advanced tax studies we didn't do this) but that was a few years ago!!

Thinking we were doing it totally wrong, I contacted my tax expert friend and he said that our way was ok (thankfully) because the numbers come out the same.

Closing this subject, can I ask that in future, can we stick to the relevant points in a thread and not digress as this nearly gave me heart failure!:001_smile:

deanshepherd

Don't want to offend Steve but perhaps you, and your friend, should have a read of SP 3/91 and in particular the section where Ssap 21 is applied, as above. Here's one link.. and another..

It wasn't that long ago you did ACCA so I'm surprised it wasn't in the syllabus.

Bringing the thread back to the original posters question..

1. Apply caution. As you can see the area is complex and views amongst advisers differ.

2. In my humble opinion, it appears that the leases you have are operating leases and hence you can claim the 'rental' payment as a deduction in the accounts, but only 50% of the VAT if they are cars.

However, you will need to check the terms of the lease carefully. The leasing companies 'sell' these types of lease on the basis you get tax relief on the repayments without really understanding whether SSAP 21 applies or not.

Good luck!

Bluewednesday

deanshepherd wrote: »

It wasn't that long ago you did ACCA so I'm surprised it wasn't in the syllabus.

I can promise it isn't! I only did advanced tax last year and I hadn't heard of this tax treatment. Glad I've found it now.

Just wondering, how would PTP or any other tax calculation program differentiate between the 2 types of asset?

Apologies for changing the direction of the thread but it has highlighted an important issue for me.

peugeot

It would take a lot more than a disagreement on here for me to take offence, Dean!:001_smile:

Certainly views differ between advisers, and we will continue doing the tax aspect the way we have always done it as we have had numerous corporation tax enquiries - none of which have ever disputed the method we adopt (per our tax partner). Certainly worth knowing about the allowable depreciation, however.

Best regards
Steve

beverly hudson

As a financial reporting trainer i can say i agree entirely with steve re ssap 21. I have also worked in tech compliance at HMRC and can confirm steves tax treatment would be valid. They have to take into consideration the clients accounting policy. So both Dean and STeve are technically correct. Just to clarify the guidance on HMRC website is not always prescriptive. Just be aware of that - its not always black and white.

peugeot

Hallelujah - please can we move on now (in my case to the pub!!):001_tt2:

Thank you Beverley for clarifying this (very arduous) issue! I was quite concerned this morning that there was an error in the way we were doing the tax aspect of finance leases, but at least it's ok. I certainly agree that sometimes it can be a bit of a minefield out there.

Finally I would like to apologise to the originator of this thread, who is no doubt totally perplexed by how all this has (unnecessarily) ended up by digressing into tax issues, particularly as the original query was relatively straight forward.

Put the invoices to motor expenses as Jan and Poodle rightly confirmed threads ago!

Best regards
Steve

beverly hudson

My pleasure. Sometimes input from another source helps to clarify what may seem incorrect may not be. The tax authority does use judgements also in areas such as these, but your treatment of finance leases - whilst not strictly to the book - would not be challenged, as it has not been during enquiries.

Jan

Closing this subject, can I ask that in future, can we stick to the relevant points in a thread and not digress as this nearly gave me heart failure!

Which is why in my reply I said " if it was a hire purchase agreement that is another story"

At the risk of causing you further heart failure Steve, can I ask why can only 50% VAT can be claimed?

Oh sorry I was presuming the vehicles in question were vans but when I re-read the original post it only refers to vehicles.:blushing: And I am sure somewhere in this loo...ong thread there is an explanation, so I'll just shut up now.

deanshepherd

I think you have just answered your own question!

The original post only said vehicles rather than vans.

Only 50% of the VAT can be claimed on operating leases for motor cars. You can claim 100% if they are in fact vans.

Poodle

Dean,

Unless it is a 'qualifying car' eg a taxi, the thread does not indicate a trade:001_smile:

Jan,

This link will help

http://www.hmrc.gov.uk/vat/reclaim-cars-motoring.htm#2

beverly hudson wrote: »

They have to take into consideration the clients accounting policy. So both Dean and STeve are technically correct.

Beverly,

So would the use of the 'acturaial method' be challenged?

Poodle

peugeot

Hi Poodle,

I would be very surprised if HMRC challenged the use of the actuarial method as this method is the most accurate.

Best wishes
Steve

Poodle

Hi Steve

I just wondered if it would be challenged.

Your previous post said that you only used 'level spread' in your practice. Is this precautionary? 'Actuarial' would allow for higher tax relief on interest in earlier years.


Poodle

peugeot

Hi Poodle,

The actuarial method is the most accurate, the level spread method (straight line method) is the most easiest (and most popular). Different firms use different methods

When we review files for other firms, we hardly ever see the sum of digits method being utilised (I saw it being used when I worked in Industry, but have never seen it utilised in practice) This method is an equally valid method of interest apportionment.

All three methods of apportioning finance lease interest are stipulated in UK GAAP (SSAP 21) and FRSSE 2007 para 7.4, though FRSSE just states finance charges are to be allocated to accounting periods during the lease term so to produce a constant periodic rate of charge (it doesn't specify the 3 methods, just that the straight line method may provide such a reasonable approximation). As long as one of those prescribed methods is being used, HMRC should not challenge it.

Best regards
Steve

beverly hudson

Hi poodle
Just out of courtesy i have replied to your query, though Steve has covered all bases adequately.

deanshepherd

peugeot wrote: »

we hardly ever see the sum of digits method being utilised

S.O.D. is my personal favourite!