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Finance Lease vs Operating Lease

After some advice please.

We have just taken out a lease for some equipment.  The Lease Agreement specifically says that ownership of the equipment remains with the Leasing Agency and that we cannot claim Capital Allowances on it.

I rang the leasing company and they advised that all payments including a large (£20k) deposit all go through the P&L.

Is this correct? We are liable for insuring the asset and can pay a nominal fee at the end of the leasing period to transfer ownership to us.

What do you think the treatment should be of it?  Should I actually put it through the P&L or on the BS (Dr Fixed Assets Cr Obligations Under Finance Lease) - and then at what point would I reclaim the input VAT.

Any advice much appreciated.

Beccy

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20th Dec 2012 12:32

Sounds wrong to me

I am open to correction but the statements you quote seem contradictory.

In the case of an operating lease it is usual for the lease to state that 'at no time will title be transferred to the lesee' or similar.  The lessor claims the C/As and the lesse is specifically excluded by HMRC rules from then taking ownership.  In such cases the goods are often passed through a third pair of hands to put the lessor and lessee at arms length in order to circemvent this bar.

For this to be the case and then there to be an acquisition fee mentioned is, as I say, contradictory.  The only way it COULD be right is if the original seller (NOT the lessor) has a contractual right to buy back the goods on surrender by the lessee and it is they that are offering to then sell the goods back for a nominal fee.  However I understand that HMRC take a dim view of such an arrangement.

 

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By neileg
20th Dec 2012 12:51

Treatment

You can't claim VAT on the capital or capital allowances regardless of the accounting treatment. You can claim VAT on the monthly payments.

If this is a finance lease then you should capitalise the asset as if you owned it. For tax purposes you will adjust the profit by adding back the depreciation and deducting the lease payments.

If the option to purchase is not part of the lease agreement but is a verbal assurance, that's OK.

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By BKD
20th Dec 2012 14:37

Largely in agreement

Except for tax treatment in previous post. Accepted practice is not to add back the depreciation, and to deduct the interest charge. End result is the same of course but there could be a timing difference depending on depreciation policy.

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By neileg
20th Dec 2012 15:06

Thanks BKD

Sorry, I'm out of date. Thanks for correcting me.

Neil

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10th Jan 2013 11:52

Sounds like an operating lease

Sounds to me like an operating leases - therefore the lease payments should go through the P&L but you should not capitalise the asset.

There is often an option in these kind of arrangements to acquire the asset at the end of the lease for a nominal amount.

Typically these kind of leases are billed in monthly or quarterly instalments.

 

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