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Weird one. Finance Company & VAT

Client purchases a machine from Belgium circa £40k (paid in Euros).

No vat on invoice - correct.

Client aproaches Finance Company (major bank) and they provided a VAT invoice for £40k + £7k vat @ 17.5%

There is a summary showing Total due           £47000

less deposit                                                  £17000

Total finance                                                 £30000

Client receives £30000 from finance company and is repaying in accordance with the agreement.

I have just spoken to the finance company because I could not understand the £17k "deposit".

The answer was that the deal was in the nature of a "letter of intent" and the deposit would have been paid to the overseas supplier.

When I asked how they could invoice my client for equipment they did not own they said "we have an invoice from client for £30k"

Next question was "is there vat on the invoice?" to which the answer was "no just £30k"

So am I missing something here?

On the face of it the finance company have lent £30k to be repaid with interest.
They have purchased a piece of equipment for £30k and sold it for £40k and have (presumably paid over £7k in VAT. But how on earth do their books balance?

My client has not recorded anything other than the original purchase and the £30k finance in and repayments out. So net his figures are right.
However surely he needs to raise a vat invoice for the sale to the finance company (but in what amount?) and put through the purchase and claim the £7k back.

Sorry it's so long.

EDIT:

Finally assuming the paperwork is correct what is the correct way to deal with the sale/purchase?

Do you have a sale of the asset purchased with loss or profit on disposal and a subsequent purchase at another figure? Or is it correct just to deal with the vat and introduce the finance?

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07th Sep 2011 10:46

Assuming that the finance agreement is a finance lease (aka HP)

The client is, having imported and paid for the machine, the legal owner.  They should therefore have invoiced the Finance Co. for £40k + VAT at 17.5%.  The Finance Co. now own the machine.

They should then show the total deal as £40k + VAT of £7k (which can all then be reclaimed by client and offset against sale invoice VAT IF they get the timing right!) + any finance charges (conspicuous by their absence in your OP, PLEASE CLARIFY).

The finance Co. has, by only paying £30k, effectively retained £17k as deposit which, in old fashioned parlance = '25% + all the VAT''.  This is done to prevent the client being better off to the tune of the VAT reclaimed!

Assuming that no depreciation has been charged against the machine your client should: -

On their sales invoice, Dr Debtors £47k, Cr FASS £40K, Cr VAT £7k.

On the agreement, Dr Leased Assets £40k, Dr VAT £7k, Dr Def. finance costs £?k, Cr Finance Creditor £sum of above.

On receipt of £30k, Dr Fin. Debtor £47k, Cr Cash £30k, Cr Finance Lease Creditor £17k.

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07th Sep 2011 11:24

Richard makes sense

 

I looked at this last night but after a hard day and brainfade I struggled with it- and having read Richard's post I fully agree.  There were two separate transactions- firstly your client buys from Belgium.  Then he sells to finance company, triggering £7,000 Output VAT.  He then can reclaim his £7,000 input VAT on the basis of his agreement documentation. Title passes from Begium to client and then from client to Finance Company.

I wonder if the Finance Company have sent a self-bill invoice in their paperwork? Either way he has that O/Tax liability matched by an identical I/Tax claim (assuming input tax docs are ok) and he's back in the same position as he would have been if he'd paid Belgium outright.

 

 

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07th Sep 2011 11:37

BTW

If my above is followed ALL the subsequent payments to the Fin Co Dr to the Creditor a/c and a j/e needs to be done periodically (for management accounts and/or stats) to write off the Def. Fin costs to P&L.  Ideally this should be calculated on the reducing balance but for a one off and relatively small amount you should be able to get away with straight line!

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Thank you

Thanks gents.

I think the final entries in Richard's answer are the wrong way round but I get the drift. The problem was the finance company did not properly advise the client. It is fairly complex after all!

On a tax note. What happens on capital allowances?

We have a purchase £40k ? AIA 100%

A sale £40k ? deduct from pool

Another purchase £40k AIA 100%

I must be missing something as this appears to give £80k AIA with an adjustment to the pool. Not having a good week!

 

EDIT OK ignore this I've just woken up!

 

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By CEL
08th Sep 2011 12:15

Finance Lease is not HP

Unless you are American, a finance lease is not the same as hire purchase.

With the former (FL), you do not own the asset(or have the right to acquire it), with the latter (HP) you do. 

Whilst the accounting treatment may be the same, the tax treatment is not.

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CEL

Am I right in saying that a "conditional sale agreement " is the same as HP? In this case there is a "final fee" of 1p. Presumably this exercises the option to buy.

With finance lease I think the tax relief follows the accounts "debits" ie interest allowed and depreciation allowed. Is that correct?

 

and where does "lease purchase " fall in this lot? With the agreement in question there is a facility fee but in the box "option to purchase fee" it is 0 + vat.

 

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