AIA - Finance Lease / HP Lease

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JamesB
JamesB Registered Posts: 51 Epic contributor 🐘
Hello all,

apologies if this has done the rounds before.

Many people are taking advantage of the AIA allowance before it ends.

When I worked at a practice if someone took out a finance lease or HP we always capitalised the list price of the asset (say £10k), worked out the total repayments (say £12k) which gave us £2k being the effective interest. This was then expensed to P & L over lease life.

In the tax return we claimed AIA on the list price of the asset.

I have been looking into this for a friend who wants to buy a commercial vehicle before 5th April and came across this on HMRC site:


A hire purchase (HP) contract is a type of finance lease where the user has the option to purchase the asset at the end of the hire period, typically for a nominal sum. In terms of economic effects the differences between a hire purchase contract and an ordinary finance lease are limited. In both cases the user of the asset enjoys the risks and rewards of ownership. But the distinction between the two has significant tax consequences for the purposes of plant or machinery capital allowances:

the finance lessor gets the allowances, not the finance lessee;
the hire purchase lessee gets the allowances, not the hire purchase lessor (CAA01/S67 and CA23310 onwards).
The parties will usually choose whether or not to enter into a hire purchase contract to maximise the use of the available capital allowances.

Contracts for the hire of an asset that contain a provision giving the hirer an option to acquire title to the asset upon the fulfilment of agreed conditions, sometimes known as HP or lease purchase contracts, fall within the definition of a lease for accounting purposes. For accounting purposes no special classification exists for HP contracts, instead they are classified, and accounted for, as finance leases or operating leases, depending on the nature of the contract. Most HP contracts, which typically have a nominal purchase price, are classified as finance leases.


So judging from the above a normal finance lease means no capital allowance/AIA are allowable for lessee, but you still capitalise the finance lease in the accounts as risks/rewards have been transferred.

If this is the case my previous employers were not treating the finance leases correctly.

Can anyone give any clarity or offer any advice on the matter?

Regards,

J

Comments

  • reader
    reader Registered Posts: 1,037 Beyond epic contributor 🧙‍♂️
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    Interesting- seems as if you cannot claim the capital allowances if there is no agreement to purchase, at an inexpensive price, the asset. This is because the lessor would have claimed the capital allowances.

    http://www.hmrc.gov.uk/manuals/blmmanual/blm00330.htm

    However I think you're still entitled to capitalize even if you are not entitled to claim the capital allowances because the "substance over legal form" concept takes precedent, e.g. if the business is using the asset as if it was owned by the business and is going to use the asset over most of its useful life:

    http://www2.accaglobal.com/archive/2888864/30941
  • reader
    reader Registered Posts: 1,037 Beyond epic contributor 🧙‍♂️
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    Just out of interest, if I were to capitalize an asset that I was not going to purchase/claim CA; how would I go about getting the tax relief on the expenditure?

    The depreciation is obviously not deductible; would I only be able to get relief on the interest payable?

    Would it be possible to treat an asset that you can't claim CA on as an operating lease, i.e. get the tax relief through allowable deductions against income?
  • deanshepherd
    deanshepherd Registered Posts: 1,809 Beyond epic contributor 🧙‍♂️
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    The basic rule of thumb is that if VAT is charged on the monthly payment, it is a finance lease (no capital allowances, but full charge to the P&L) and if VAT is not charged, it is a hire purchase (claim capital allowances, but only the finance element of the charge to the P&L).

    If you have a finance lease but are required to capitalise as an asset then you can't claim capital allowances but the depreciation is an allowable expense.
  • JamesB
    JamesB Registered Posts: 51 Epic contributor 🐘
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    Thanks Dean, that is what I thought.

    I assume that is why when you take out a HP you pay the VAT up front as the initial 'deposit'.

    I have told my friend to take out the HP option to take advantage of the AIA.

    Thanks everyone.

    J
  • stevo5678
    stevo5678 Registered Posts: 325
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    Hi,

    Technically it's all about the rights of ownership from an economic point of view not a legal one.

    There is a rule called the 90% test. Basically if you have the responsabilities to maintain the vehicle etc and you are going to use it for most of its EUL then you should capitalise it and claim the AIA.

    99% of the time in such circumstances you will claim the VAT all up front on the cost, and as Dean states VAT is rarely charged monthly on MV's where it is a HP agreement.

    Quote - Dean

    "The basic rule of thumb is that if VAT is charged on the monthly payment, it is a finance lease (no capital allowances, but full charge to the P&L) and if VAT is not charged, it is a hire purchase (claim capital allowances, but only the finance element of the charge to the P&L)."

    Just to clarify, a hire purchase agreement is a form of finance lease where it is capitalised (not charged to P & L-only dep'n). An operating lease is where you are effectively leasing the MV and not owning it.

    IAS 17

    Classification of Leases

    A lease is classified as a finance lease if it transfers substantially all the risks and rewards incident to ownership. All other leases are classified as operating leases. Classification is made at the inception of the lease. [IAS 17.4]
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