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Are monthly lease payments deductible for tax?

A client has taken out a finance lease for a VW van with a value of £31,000.  I am of the understanding that I should capitalise the van as follows:

DR - Vehicles (Asset)
CR - Finance Lease - VW Van

The monthly payments are then:

CR - Bank
DR - Finance Lease - VW Van

My question is, are the monthly payments of £400 + VAT not tax deductible as the finance lease entry is also a balance sheet entry unless I'm mistaken?  I know I still need to depreciate the asset and I have worked out the interest payable which I know would go to the P&L, although the depreciation needs to be added back.  

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By Matrix
20th Jun 2018 19:55

You would claim capital allowances. Also reclaim all the VAT upfront.

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By Ruddles
to Matrix
20th Jun 2018 20:00

I can’t tell if you’re being serious or sarcastic. I hope that it’s the latter.

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By Matrix
to Ruddles
20th Jun 2018 20:06

I mean on the van, I am not suggesting to claim capital allowances on the lease payments. Surely this does not need to be spelled out.

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By Ruddles
to Matrix
20th Jun 2018 20:27

Clearly it does need to be spelled out.

Where is the authority that allows capital allowances to be claimed on an asset ‘acquired’ under a finance lease?

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By Matrix
to Ruddles
20th Jun 2018 20:37

I assumed they had purchased the van and if not then how do they get relief if not through capital allowances? Please advise the OP of how to get tax relief if this is not the mechanism.

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By Ruddles
to Matrix
20th Jun 2018 20:45

Do you really not understand what a finance lease is (and its tax treatment)?

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By SXGuy
to Matrix
21st Jun 2018 09:21

Come on. This is basic stuff. If the van is in lease they haven't purchased anything. To purchase something it would at the very least be a hire purchase agreement. Then maybe capital allowances would apply. But in no way is a lease an asset since the company doesn't nor will ever own the van. Thus no capital allowance either.

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By Ruddles
20th Jun 2018 22:57

To the OP - before I try to steer you away from the misleading, sorry, wrong advice above, are you satisfied that the lease is a finance lease? £400 per month for a £31k asset suggests an unusually long lease term for a van. Unless there’s a large balloon payment due at the end?

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By OC
21st Jun 2018 07:27

sounds like an operating lease to me...£400+vat per month on a £31k asset...thats forever if its HP

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By Ruddles
to OC
21st Jun 2018 08:26

As above, that was my thought, but there could be a balloon payment. I guess, given the OP’s anonymous status, that we’ll never know.

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21st Jun 2018 08:36

The first question would seem to be; under the terms of the agreement, or contract, will there be an option to purchase the vehicle, at the end of the term?

You mention that the vehicle has " a value of £31,000", not that that value is being financed. This element of your enquiry has created confusion in the thread.

If there is not an option to purchase, then the monthly payments, of £400.00, will be revenue expenditure and, would simply be included in the profit and loss account, and claimed accordingly, against income. The business wouldn't be acquiring the vehicle and wouldn't include it in the balance sheet.

Assuming that your client is registered for value added tax, in simple terms, the vat input tax would be recoverable.

If the agreement or contract is; hire purchase, or "balloon" plan which I very much doubt then your initial views, may have validity.

It really is a fairly simple case of knowing what type of finance arrangement has been used. The agreement document will of course outline these essential details.

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21st Jun 2018 08:39

I believe the lease to be a finance lease as I should have made it clear that there was a deposit payment of £7,220 and in the final year there is a balloon payment of £12,353.

I also never intended to ask the question as anonymous. That was a mistake!

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to MrDSGrace
21st Jun 2018 09:05

"I believe the lease to be a finance lease as I should have made it clear that there was a deposit payment of £7,220 and in the final year there is a balloon payment of £12,353."

I'm sure you'll readily agree, these were material facts and, could have saved some time, if they'd been provided within the initial enquiry?

In providing this further information, I'd venture to suggest; that the whole of the vat input tax could be claimed at the tax point. This assumes the business is registered for Vat?
The vehicle becomes an asset of the business and, in turn, may be available for an annual investment allowance claim.
The regular monthly payments (vat has no relevance here) are repayments to the finance agreement, thus reducing the debt, the the finance provider.
They are NOT charged to the trading and profit and loss account.

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By Ruddles
to Chris.Mann
21st Jun 2018 09:11

Oh for goodness sake. Am I the only one around here who knows what a finance lease is?

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By SXGuy
to Ruddles
21st Jun 2018 09:27

Don't worry I got you on this! I think some people are missing the obvious.

Lease agreement, the initial deposit is actually, an initial rental deposit, its not a deposit against purchase, its an upfront rental payment.

The balloon payment is common, its the agreed buy back value, providing the van is valued at or more than the agreed buy back (balloon) there's no further charge.

Don't confuse this with HP agreements, initial deposit and final payments!

It's very simple, if vat registered claim the vat value back in full, rental payments are a P and L expense, no asset to balance sheet and no capital allowances!

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to SXGuy
21st Jun 2018 09:41

So this is exactly what I had done up until now. CR - Bank and DR - VW Van Expense Nominal.

However, upon reading about leases in FRS 102, it seems that this should be classes as a finance lease. Upon reading about the treatment of finance leases, on this site I might add, it seems I need to capitalise the van as per my initial question. This then leaves nothing going to the P&L.

Here is the link https://www.accountingweb.co.uk/business/financial-reporting/frs-102-fin...

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By SXGuy
to MrDSGrace
21st Jun 2018 10:28

Yes but there are other types of leases. Lease contract hire, lease with option to buy.

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By Ruddles
to SXGuy
21st Jun 2018 11:07

Quote:
It's very simple, if vat registered claim the vat value back in full, rental payments are a P and L expense, no asset to balance sheet and no capital allowances!

That's not quite correct, either.

Capitalise the asset. Claim back the VAT in full. Depreciate the asset, and allow the depreciation. Difference, if any, between total payments due under the lease and the value of the asset capitalised is 'interest', spread over the term of the lease and allowed as a deduction.

Treatment that has been established and, or so I thought, well-understood for years.

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to Ruddles
21st Jun 2018 11:33

My understanding is that depreciation is not an allowable expense for tax purposes and I can't find anywhere that says otherwise. Could you point me in the right direction to where it says I can allow the depreciation?

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By CTA
to MrDSGrace
21st Jun 2018 12:02

Quote:

My understanding is that depreciation is not an allowable expense for tax purposes and I can't find anywhere that says otherwise. Could you point me in the right direction to where it says I can allow the depreciation?

Statement of Practice 3 (1991).

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By Ruddles
to CTA
21st Jun 2018 12:39

Beat me to it! There is also guidance in HMRC’s Business Leasing Manual - it’s not that hard to find (point addressed to OP and all the others who find finance leases so hard to deal with).

The point is that depreciation is not allowable per se. What is allowable is a reasonable calculation of the capital element of the periodic lease payments and HMRC accept a commercial depreciation charge as reflecting that capital element. The ‘interest’ element should already have hit the P&L

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to Ruddles
21st Jun 2018 09:48

Only half a story usually results in a half baked answer!

I really wish I'd never (******) bothered thinking this place held any interest any longer.

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to Chris.Mann
21st Jun 2018 09:56

I don’t think that’s the case to be honest with you. I appreciate your input before now. I asked a very simple question which was basically “are monthly payments under a finance lease non tax deductible”. The question then becomes complicated by others. From my reading of FRS 102 it seems that this is the case but came here to double check as there is a wealth of knowledge. It seems however, that any question that gets asked turns into an argument or someone tries to put someone down.

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