Hire Agreement - Asset Finance re Taxi

msf

Hi
client has got a taxi under the hire agreement for 5years on fixed monthly payments (vat applied) value £26k (£20k loan, £6k charges).

The finance company are saying the asset does not belong to hirer and should not claim allowances but can claim the rentals paid each month. Should they give something to support this in writing?

the asset will be acquired by my client at the end of period.

Does the finance loan need to be shown on balance sheet? Its the first for me and wanted to know if any of you have clients as such and how you treated this in accounts.

thanks in advance for any comments.

stevo5678

Hi.

You are definitely right in wanting to show it as an asset in the accounts and also the finance. I have never heard of a finance company tell you what to do with your own accounts! That's just ridiculous. Under the appropriate accounting standards you are supposed to show it this way. It may legally still be the finance companys car but that means nothing in this context.

The only way in which you should not show it as an asset is if the finance co issue monthly lease invoices. The rules state that if you have the risk and rewards of ownership then you treat it as your asset. There's a formula for this but not needed in this case as a hp agreement like this is just standard.

In terms of tax yes you can claim CAs. Not an issue. Also although it's a car you can claim 100% AIA as it's used as a commercial vehicle.

scribes

If the monthly invoices from the finance company have vat on them this is not a company asset. Did the supplier provide a vat invoice for the Taxi?

You need to confirm before you do anything.

stevo5678

Agree with last post most of the time however even if there is VAT and it is deemed a operational lease per the finance co but you benefit from the 'risk and rewards' of the asset for the majority of it's useful life you can still capitalise it.

This concept is known as 'substance over form'.

So the finance co can call it what they want but from an accounting point of view IAS 17 is king:




SSAP 21 at paragraph 17 defines a finance lease as ‘...a lease that transfers substantially all the risks and rewards of ownership of an asset to the lessee’. SSAP 21 also defines an operating lease as simply ‘...a lease other than a finance lease’.
Whether or not a lease passes substantially all the risks and rewards of ownership will usually be clear in the lease terms. IAS 17 stipulates guidance when substantially all the risks and rewards of ownership are passed to the lessee:
 The lease transfers ownership to the lessee at the end of the lease term.
 The lease contains a bargain purchase option at the end of the lease term.
 The lease term is for the major part of the asset’s useful economic life. The present value, at the inception of the lease, of the minimum lease payments is at least equal to substantially all of the fair value of the leased asset, net of grants and tax creditors to the lessor at that time (title may or may not eventually pass to the lessee).
 The leased assets are of such a specialised nature that only the lessee can use them without modifications being made.
IAS 17 goes on to offer a further three indicators which may suggest that a lease might be properly considered as a finance lease:
 If the lessee can cancel the lease, the lessor’s associated costs with the cancellation are to be borne by the lessee.
 Gains or losses arising from the fluctuation of fair value of the residual amount will accrue to the lessee.
 The lessee has the ability to continue the lease for a supplemental term at a rent that is substantially lower than market rent (a ‘peppercorn’ rent).