Car leasing - could someone glance over this for me please

Sarah-LouSarah-Lou Well-KnownPosts: 141Registered
Client thinking of leasing a car - she doesn't know whether she has an option to buy it at the end or whether it gets returned with no option.

Am I right in thinking that as it is leasing she can claim all the costs as expense? I think it needs to be shown in the balance sheet now too?

It isn't all going to be business use so appreciate that it can't all be put through on this basis but technically if it was all business she could do or is it just the interest on payments and not the payments themselves that can be put through?

Thank you :)

Sarah-Lou

Comments

  • KernowAccountantKernowAccountant Settling In Nicely Posts: 120Registered
    Sarah-Lou wrote: »
    Client thinking of leasing a car - she doesn't know whether she has an option to buy it at the end or whether it gets returned with no option. Am I right in thinking that as it is leasing she can claim all the costs as expense? I think it needs to be shown in the balance sheet now too? It isn't all going to be business use so appreciate that it can't all be put through on this basis but technically if it was all business she could do or is it just the interest on payments and not the payments themselves that can be put through? Thank you :) Sarah-Lou
    Sadly the forum isn't allowing me to format this; sorry for the block of text!! Leasing is a complex issue; my reply below has a few generalisations and there are exceptions to it - so before some smart arse picks holes.... I know!! I assume we're not talking about a company, and are reporting under UK GAAP. Off the top of my head... Firstly, accounting treatment. It is important to establish the nature of the lease; it'll either be a finance lease or operating lease. A finance lease transfers substantially all of the risks and rewards of ownership to the lessee. All other leases are operating leases. Under SSAP 21 it would normally be assumed that all risks and rewards of ownership have been transferred to the lessee where the present value of the minimum lease payments are equal to or greater than 90% of the fair value of the leased asset. Rentals paid under an operating lease are charged to the profit and loss account on a straight line basis over the lease term. Assets held under a finance lease are capitalised (with a corresponding liability) at the present value of future lease payments (discounted at the interest rate implicit in the lease). In practice, fair value is usually substituted for the PV of future lease payments. The lease payments are charged against the liability over the lease term and the discount unwound, this being charged to the P&L. The asset should be depreciated over the shorter of the lease term and the asset's useful life unless the lease is a 'hire purchase' agreement - here depreciation is charged over the anticipated useful life of the asset. Broadly, the rentals under an operating lease will attract tax relief as they are charged to the P&L. Clearly any adjustment for private use must be made and there is also a restriction for high emission vehicles. Under a finance lease (which is not a hire purchase/lease purchase arrangement) the depreciation will represent an allowable expense (again, observe the adjustments mentioned above). The unwinding of the discount is also allowable Finally, where the lease provides for the lessee to acquire the asset (a hire purchase/lease purchase arrangement) then CAA 2001 creates a 'notional' ownership at the inception of the lease and tax relief is granted by way of capital allowances - again, a private use adjustment may be required. The unwinding of the discount is allowable. Finally, I will stress again - this is a brief overview - nothing more. I've hardly scratched the surface!!
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