I understand that under the current arrangements plant that is leased under a finance lease is treated differently to plant obtained under HP.
Under HP you show the assets purchased in the BS plus there is a corresponding HP liability. As repayments are made you claim the interest as a cost. The asset is depreciated like any owned asset. Tax relief for the capital cost is obtained by adding back the depreciation and deducting capital allowances in the tax comp.
Under a finance lease, my understanding is that, the accounting treatment is the same as an HP agreement - show the asset in the BS with a corresponding lease creditor. You show the interest element of the lease payment as a cost in the P&L and depreciate the asset over it's economic life.
However capital allowances are not available as they are claimed by the lessor. Do I understand correctly that you then do not disallow the depreciation on those leased assets in doing the tax comp to obtain relief for the capital cost. Also do I understand correctly that the 'depreciation' left in the tax computation as a charge has to be calculated over the economic life of the asset not just the primary period of the lease.
Am I missing anything?
I understand these rules are changing for finance leases entered into after 1 April 2006 when they will be treated the same as HP and the capital allowances will be claimed by the lessee.
Neville Ford
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Depreciation of leased assets
Assuming that the Revenue have not revoked it, their view on the basis on which finance lease rentals should be relieved in the computations of the lessee are set out in Tax Bulletin 15, Feb 1995, pages 189 - 193.
It is the rentals that are deductible but for timing of deduction they allow the finance charge and accounts depreciation.
The changes due for next year will affect only longer funding leases
thanks for this
I always wondered how this dichotomy was dealt with in practice and this seems to be the clearest explanation - I believe there is an esc or sop on this subject as well
How do you show the adjustment on the tax return?
Neville
I was about to post a similar question.
Did you establish as to how the P & L adjustment should be shown on the corp tax or SA tax return?
eg do you add back the depreciation and then deduct a 'finance lease' figure from the profit?
HP
If the contract under which the user hires the plant or machinery provides that he shall or may become the owner on the performance of the contract, the user is treated as owning the plant or machinery at any time that he has the benefit of that contract (CAA 2001, s.67(2)).
The Revenue have been reviewing the treatment of finance leases and a consultation document is in issue but not, to my knowledge, any legislation yet enacted.