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How to reduce 40% tax by maximising the Finance Lease Claim in the first period

Finance Lease currently treated as depreciation claim x 25% of 47 rental payments apportioned to 7/12ths because the company had use of the vehicle from the end of March to the end of October (year end).   Therefore £10,281.00

Details:-  Finance Lease signed end March.

Per Lease agreement the primary hiring period = 43 months

Minimum lease payments (per a recent letter enclosing interest details) = 42

Cost = £54,000 net of VAT

Interest = £17998.55

According to Agent the Lease period is 48 months and the 6 up front lease payments do not reduce this period although they are itemised by the Lessor as 1 initial rental commencing 7/4/11. 

Monthly rental =1499.97

Interest started around £750 for 1st initial rental (although this had been treated as 6 primary rentals) reducing over the 43 rentals to 0 and totalling £179998.55.

As this has taken the sole trader into the 40% tax bracket I would like to be able, to argue, with reference to FRSSE that the accounts be changed.

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By BKD
15th May 2012 15:36

Where/what is the question?

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16th May 2012 08:26

My Question .....

Thanks for replying BKD.

How to reduce profits as much as possible within UK GAAP and FRSSE?

FACTS

Apr to Oct interest = 5500 (EST as dont have figs with me unfortunately but available) ie 7 installments.

Apr payment (not a deposit)  8999.82 (incl interest x1 of approx £750.00) being 6 x 1499.97

MY CALCS

I would like to be able to claim  7 interest payments totalling 5500.00 (Apr to yr end)

plus depr of 54000/43 x 7 = 8791

 

AND NOT AS CURRENTLY CALCED

Based on it being a 4 year lease.

(25% of 54000) plus (25% of 17998.55) apportioned to 7 months up to yr end- (Accountants accept that their calcs slightly out and that not split between interest and depr but thats not my argument)

MY QUESTION

I have argued that the actual interest should be used but is there an argument for using my figures and not April interest plus May interest (6 up front payments + 1 per straight line calc according to the way the Accountants interpret the FRSSE) and also depreciating over the 43 payments rather than 48.

 

 

 

 

 

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By BKD
16th May 2012 10:20

I disagree with the FRSSE

The Standard requires that finance charges should be calculated so as to give a constant periodic rate of return on the outstanding obligation. Although the FRSSE says that a straight-line calculation gives a reasonable approximation of that rate of return, I disagree. And in any event, there is no requirement to use a straight-line calculation.

You should depreciate the asset over the shorter of the asset's useful economic life and the term of the lease - the number of payments (48 or 43) is therefore irrelevant.

Based on your numbers above, I calculate the deduction for the 7 months as being £12,696:

7 months' interest £4,821 (I can't see where you get £5,500 from)

7 months' depreciation £7,875

That is based on the 48-month term of the lease. If you can demonstrate that the economic life is shorter, you could increase the depn element, but I don't think the interest charge is affected.

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16th May 2012 23:20

No Im still confused.....

FACT The lease term is shorter than useful economic life.  Sorry I should have stated this.

Do you take this to be a 4 yr lease then?  How is this defined?   Even though from signing of the lease to the last primary payment the period is 43 months?

I now have the exact interest paid provided from the lessor - not sure if you are saying this can be used - 7 months Apr to October = £5002.79.  Interest for Apr was £753.58, May 740.70.

I'm afraid I cant see how you have calc'd your interest figure of £4821.

Sorry BKD - I appreciate your help. 

 

 

 

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