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Company fixed assets not in company name

A relative of the sole director of a company has financed a piece of machinery for the company.

Would the machinery be classed as an asset within the company even though the finance of the asset is not in the company name? 

The business is very specialist as is the machinery so could only used in the specialist sector the business operates. The machinery also has the company name printed on it.  The company also has a standing order to the relative to pay the exact amount the finance is each month.

my thinking is the machinery couple be classed as a company asset since it could only be used in this sector and relative who financed the machinery would have no use for it. Company name is printed/sign written all over the asset plus also payments made. 

Would this then be a family within the company rather than a finance/hp creditor? 

Thanks in advance 

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19th Jan 2018 07:09

Is the agreement an operating lease or a finance lease?
What is the agreement between co and relative? Or is it between relative and director?
What do you mean by 'a family within the company'?

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By Beak07
to WhichTyler
19th Jan 2018 07:58

It’s a finance lease. There is no such agreement as of yet although I’m sure one could be drawn up if needed. Sorry I mean would this be treated as a family loan within the company or as a hp agreement. Thanks

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to WhichTyler
19th Jan 2018 08:12

Quote:

What do you mean by 'a family within the company'?

I think the OP means a creditor loan to the family member, as opposed to a HP loan on the Balance Sheet.

Quote:

Is the lease an operating lease or finance lease?

OP - what we’re trying to discover is which of the following is the case:

1. The company has purchased the machinery outright from the supplier. In order to finance the purchase, the director’s relative has taken out a loan to pay the supplier (similar in concept to the company getting a bank loan); or

2. The machinery has been purchased via eg HP and is owed by the finance company (Assetec, Investec, Lombard, Blackhorse) until the final payment is made (sometimes a balloon payment). Think the car lease concept.

Once you’ve decided which one is relevant, the answers are:

1. Fixed Asset (the company owns it). The creditor on the Balance Sheet will be the relative. If there is no formal loan in place, the interest element that the company pays the relative must have 20% tax deducted, be declared on a CT61 and paid to HMRC each quarter. The individual should then declare the gross interest received (including the 20% that was deducted), less the interest that they paid on their personal tax return. This will show a nil profit and they can reclaim the 20% that was paid to HMRC/ use it as a credit on any other tax due.

2. Not fixed asset as the company doesn’t own it. Expense should be in the P&L. Once the company does own it (at the end of the HP agreement), if there is a balloon payment it would normally be capitalised at that value. If no balloon payment, you wouldn’t bother.

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to atleastisoundknowledgable...
19th Jan 2018 08:23

The VAT might be a bigger issue.

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to lionofludesch
19th Jan 2018 08:38

D’oh [smacks head]

1. You can claim the VAT (Assuming the invoice is isn’t eh company name).

2. The HP company would be charging the relative VAT, but unless they were VAT registered as an individual (eg sole trader business), they wouldn’t be able to claim it, even then not in every circumstance. That being so, they also wouldn’t be able to charge VAT to the company, so you would lose out on any potential VAT reclaim (assuming the company is VAT registered). Oooops - bet you wish this had been discussed first!

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to atleastisoundknowledgable...
19th Jan 2018 09:19

Not sure I agree with this. HP is usually a financing arrangement only, with risks and rewards substantially transferred to the lessee, making it a finance lease. Whilst legal title passes upon settlement of the final payment, for accounting and tax it is broadly treated as if you had bought it via a bank loan - capitalised as a fixed asset, with a corresponding creditor. As a result, turning to the VAT comment further down, the VAT is therefore usually charged by the supplier, not the finance company.

The balloon payment is important - because if there is an option to buy, it will often affect the treatment regardless of whether it is taken up. Where it is a pure lease hire, with no option to purchase, then you would normally see a monthly hire charge, plus VAT, and this is when you would have a P&L expense.

Am I missing something?

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to Richard061083
19th Jan 2018 09:43

The OP states that the finance has been taken out by the relative, not the company.

So the individual has it as an asset as per your logic, but it’s not legally theirs to sell to the company - they can only loan it to them until title passes from the finance company to themselves.

Equally, the VAT will have been charged to the individual.

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to atleastisoundknowledgable...
19th Jan 2018 10:08

I agree, in this scenario there wouldn't be an HP creditor, because it's in the individual's name, but the question is whether it is an asset or an expense in the company accounts. I was more clarifying my understanding of the general position surrounding HP, which you indicate should be expensed to the P&L as payments are made, except for a final payment - I would expect the payments to be split between capital repayments and interest expense, rather than wholly expensed, and I wouldn't expect VAT to be charged by the HP company, as they are purely financing, not selling the asset.

Has the agreement been direct, the company still wouldn't have legal title, but for accounting purposes it would be treated as if it owned the asset on the basis that it is a finance lease, and so the fact the individual doesn't own it to be able to formally sell it is a bit of a red herring in my opinion.

The fact is that there is no agreement between the individual and the company yet, and so there is no definitive answer. However, I suspect the most obvious thing would be for the company to "hire" it from the individual on the same terms, so that risk and reward of ownership still passes to the company, and therefore it is shown as an asset. If the point was that the only reason for doing this was because company couldn't obtain the credit, then it may be that the intention is for everything to flow through so that it has no net effect on the individual.

I think a further point to consider is what the terms of the agreement that the individual signed are, as this may prevent them from onward leasing it, and so care should be taken around how it is disclosed.

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to Richard061083
19th Jan 2018 14:31

Quote:

I agree, in this scenario there wouldn't be an HP creditor, because it's in the individual's name, but the question is whether it is an asset or an expense in the company accounts. I was more clarifying my understanding of the general position surrounding HP, which you indicate should be expensed to the P&L as payments are made, except for a final payment - I would expect the payments to be split between capital repayments and interest expense, rather than wholly expensed

Yes, but my thinking was that the individual would (let's pretend they prepare a Balance Sheet of their life) treat it Dr FA/ Cr HP as per your suggestion, but would then lease it to company, hence the P&L narrative.

If

Quote:

owever, I suspect the most obvious thing would be for the company to "hire" it from the individual on the same terms

Then wouldn't car hire go straight to the P&L?

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19th Jan 2018 08:00

It sounds as though the intention was for the "family member" to finance this as agent for the company.

What evidence, if any, do you have that this was indeed the case ? Why was it done this way ? Could the company not have obtained the finance with a directors' guarantee or summat ?

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By Beak07
19th Jan 2018 08:45

The company is not vat registered so their is no issue regarding vat.

The company was a new company and with directors poor credit he couldn’t obtain finance himself, he did attempt to.

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