Advice on car finance lease balloon payments

If a car has been fully depreciated, is the balloon payment a credit on the P&L on disposal?

Didn't find your answer?

  • Example :
  • Car cost £12,000 (reverse to remove from accounts)
  • Depreciation £12,000 (reverse to remove from accounts)
  • Balloon payment £6,000 to P&L on disposal of car as a profit, the opposing entry relates to the car loan.
  • WDV b/f £9,000
  • less balloon payment £6,000 making a balancing allowance of £3,000.

Am I correct with this? Also how do you explain it to clients who refuse to accept this because their answer is that they haven't received any money for the car?

Thanks

Replies (25)

Please login or register to join the discussion.

avatar
By paul.benny
05th Aug 2020 16:15

Your example doesn't make sense to me. In most car finance the balloon payment is an optional amount at the end of lease to take ownership of the vehicle.

Looks like you've capitalised this as a finance lease. I think that's moot with contract hire as the risks and rewards of ownership don't fully transfer to the hirer - the finance company retains the risk of the residual value and there is plenty of useful life remaining at the end of the lease term.

Thanks (2)
Replying to paul.benny:
Psycho
By Wilson Philips
05th Aug 2020 17:03

If it's been capitalised as a finance lease then capital allowances have nothing to do with it.

I would normally ask the OP for further information but in light of JS's instructions not to interrogate the questioner, I'm leaving it there.

Thanks (2)
Replying to Wilson Philips:
avatar
By Anonymous.
05th Aug 2020 17:06

Wilson Philips wrote:

I would normally ask the OP for further information but in light of JS's instructions not to interrogate the questioner, I'm leaving it there.

Did I miss that? So we have to have a stab at an answer even when it's obvious there isn't adequate information?! Very strange on a professional forum!

Thanks (0)
Replying to Wilson Philips:
RLI
By lionofludesch
05th Aug 2020 17:07

Wilson Philips wrote:

I would normally ask the OP for further information but in light of JS's instructions not to interrogate the questioner, I'm leaving it there.

So how do we get at the facts ? Just guess ?

Thanks (0)
Replying to lionofludesch:
avatar
By Tax Dragon
05th Aug 2020 17:10

Whoa, you and Anonymous. need to lay off with the interrogation. We can't have one rule for OPs (no questions please) and another rule for respondents (bring in the bright lights and uncomfy chairs).

Can we?

Thanks (3)
Replying to Tax Dragon:
Psycho
By Wilson Philips
05th Aug 2020 17:17

Looks like I'm on the naughty step now

https://www.youtube.com/watch?v=hl-QR-KNwck

Thanks (0)
Replying to Wilson Philips:
avatar
By frankfx
05th Aug 2020 18:28

Wilson Philips wrote:

If it's been capitalised as a finance lease then capital allowances have nothing to do with it.

I would normally ask the OP for further information but in light of JS's instructions not to interrogate the questioner, I'm leaving it there.

OP have you read and digested Wilson's very helpful answer?

Does it align with the facts, which you may not have presented to the forum?

if Wilson's reply is factually correct , then your interpretation of the outcome is way off course.

By extrapolation have you always followed the tax practice outlined in your question?

Please cite your own research supporting your tax and accounting treatment , whereupon we may be able to assist.

You never know many AWEBBERS may be getting it wrong.

JS suggests that interrogation is unfair, yet we constantly interrogate clients to get the full picture on their actions and transactions , and we interrogate our research material to marshall a full contextual answer.

We can not give a meaningful answer in the absence of full relevant details.
such answers then assist all AWEBBERS.

As Newton's Laws imply... cause and effect.

Thanks (2)
avatar
By Bobbo
05th Aug 2020 16:38

Might have made sense to use the balloon payment as the residual value of the car for depreciation purposes so that on handing it back the NBV of the car equals the finance liability (balloon payment amount) and no profit or loss on disposal arises.

Perhaps the numbers in your example are simplified to illustrate the point but should such an arrangement have been treated as a finance lease in the first place?

Thanks (0)
Replying to Bobbo:
avatar
By Saadia Davis
05th Aug 2020 16:50

So for capital allowance purposes, would the WDA be on £6,000 rather than £12,000?

Thanks

Thanks (0)
avatar
By frankfx
05th Aug 2020 17:17

imagine we are the clients.
we remain in a state of ''refusal''.
Sir Isaac Newton's First Law of Motion , holds true.

Thanks (0)
Replying to frankfx:
avatar
By Dib
06th Aug 2020 14:33

I'm confused. Are we in a state of rest or uniform linear motion?

Oops, asking a question!

Thanks (0)
avatar
By Paul Crowley
05th Aug 2020 20:21

This is complicated.
A finance lease is treated as if it is HP for accounts purposes BUT NOT treated the same way for tax purposes. For tax it is just a hire.
It is an artificial constuct purely for accounts disclosure purposes.
REAL LIFE
Nobody really cares about this except the accountancy regulatory bodies
Make sure that the tax is correct, You should have only claimed tax relief on the total payments made and HMRC will be on a sticky wicket only able to worry about timing of tax not quantum of tax

Thanks (0)
Replying to Paul Crowley:
avatar
By Tax Dragon
05th Aug 2020 20:25

Paul Crowley wrote:

You should have only claimed tax relief on the total payments made.

Isn't this the nub? And doesn't it make it easy to explain to the client? They (though sometimes not their accountant) can easily understand the equation Amount paid = Amount on which tax relief obtained.

Thanks (0)
avatar
By Paul Crowley
05th Aug 2020 20:26

For Ops benefit
The site regulators have made quite plain that any comment that appears to criticise or in any other way belittle any OP who asks a question is unacceptable from the regular unpaid responders

https://www.accountingweb.co.uk/any-answers/do-you-charge-vat-on-sales-t...

Per Wilson read JS comments

You are unlucky as we have all been notified as likely to be resticted in our responses

If you are still struggling then PM me and I will gve a number that you call and explain calmly my understanding. In a call we can chat rather than play email bat and ball

Thanks (0)
Replying to Paul Crowley:
avatar
By Anonymous.
05th Aug 2020 20:25

Paul Crowley wrote:

For Ops benefit
The site regulators have made quite plain that any comment that appears to criticise or in any other way belittle any OP who asks a question is unacceptable from the regular unpaid responders

https://www.accountingweb.co.uk/any-answers/do-you-charge-vat-on-sales-t...

Per Wilson read JS comments

Thanks. Hadn't seen that.

Anyway, noted. Rather than 'forensic questioning' we should just make assumptions and hope they are appropriate to the question.

Thanks (0)
Replying to Anonymous.:
avatar
By Tax Dragon
05th Aug 2020 20:50

Better, ignore the question. (If you find yourself asking for more info or making assumptions, it's probably not the sort of question that it is appropriate to try to answer. IMHO.)

Thanks (1)
Replying to Tax Dragon:
avatar
By Anonymous.
05th Aug 2020 21:10

Tax Dragon wrote:

Better, ignore the question. (If you find yourself asking for more info or making assumptions, it's probably not the sort of question that it is appropriate to try to answer. IMHO.)

Fair point but I wonder what % of (certainly tax technical) questions include all the necessary information? Hey ho!

Thanks (0)
Replying to Anonymous.:
avatar
By Tax Dragon
05th Aug 2020 21:32

https://www.accountingweb.co.uk/any-answers/intangible-fixed-assets-fa-2...

Model tax answer. (Ironically, I'd say the question included unnecessary info. But it's not bad.)

(My point being that you really only need info if you want to advise. In here, I don't.)

Thanks (0)
Replying to Anonymous.:
John Stokdyk, AccountingWEB head of insight
By John Stokdyk
06th Aug 2020 12:55

Is it my imagination, or are accountants trained to push every logical inference to its extreme?

To be more accommodating, all of my recent comments are about tone, atmosphere and mood... intangible things that involve a little judgement. If I'm not mistaken, that's something accountants are encouraged to develop.

We haven't banned any questioning whatsoever, but are trying to avoid situations where it looks like a bunch of accountants have ganged up to chase an interloper away. It happens on this site and is not very pretty.

CS777 stated the case very effectively on the other thread mentioned and I've taken some of those comments on board.

If some of the most militant protesters are willing to listen to what the AccountingWEB moderation team is trying to achieve (a less hostile, more productive atmosphere), we'll do our best to pay attention to the where the grey areas might be. Isn't that what constructive debate is supposed to be about?

Thanks (0)
Replying to John Stokdyk:
avatar
By Paul Crowley
06th Aug 2020 14:42

Nobody is getting bullied by chats about biscuits.
Accountants are expected to get at the facts, not guess' intangible things', That is of course if civilans want a considered reliable answer.

What is critical is tax, not accounting disclosures. Tax is law and has a correct solution, Accounts are not law but accepted practise decided by people from the big firms acting on committees.
The problem is that people confuse the two. Capital allowances on Finance leases appears to be a common issue.

If answering an accounting issue could lead to a tax error then questions are absolutely unavoidable

If regular can see that OP is so far away from reality then what should be said?

Thanks (0)
Replying to John Stokdyk:
avatar
By Paul Crowley
06th Aug 2020 14:52

For debate purposes it may be useful to be precise.
List recent threads that you consider aggressive, but identify if OP got sufficient advice, based on Ops question
Also subdivide into civilian and accountant OP

List a few acceptables, I am sure there will be numerous.

Thanks (0)
Replying to John Stokdyk:
By ireallyshouldknowthisbut
06th Aug 2020 14:53

"Is it my imagination, or are accountants trained to push every logical inference to its extreme?"

Well actually, yes we are.

Much of tax practice is based on logical inference from tax law.

Thanks (0)
Replying to John Stokdyk:
Stepurhan
By stepurhan
06th Aug 2020 15:29

John Stokdyk wrote:

To be more accommodating, all of my recent comments are about tone, atmosphere and mood... intangible things that involve a little judgement. If I'm not mistaken, that's something accountants are encouraged to develop.


Then, in the interests of restoring harmony in the forums, I suggest you ask an independent person you trust to be brutally honest with you to review the tone and content of your own recent posts.

I personally feel the response you are getting is because you have adopted an overly hostile tone yourself. The fact that several people, myself included, interpreted your words as meaning we should not ask questions also indicates (to my mind) that is how the words you chose come across (whether you intended them to or not).

You don't appear ready to trust this evaluation from members here, and I can at least partially understand why not. But effectively accusing everyone of deliberately misinterpreting your words (more than once I might add) instead of stepping back to consider whether you may be responsible for coming across that way is not going to make things any better.

Thanks (2)
Replying to stepurhan:
avatar
By Tax Dragon
06th Aug 2020 15:40

IMHO a lot of the 'tone' (especially, if I may, in relation to John's comments) is in the ear of the reader. [I've confused myself with the metaphor. I mean it's read in, not written in.]

But now I am migrating here: https://www.accountingweb.co.uk/any-answers/the-any-answers-advice-line

Thanks (0)
avatar
By frankfx
05th Aug 2020 23:21

Essentail reading :

https://www.accountingweb.co.uk/any-answers/are-monthly-lease-payments-d...

Those were the days .Mary Hopkin

Two years on from the above link:

Its like deja vu ,all over again. Yogi Berra

Biff . Bam . Wham.

Thanks (0)