Double entries for electric car lease agreement

The owner enetered into car lease agreement, I'm not sure how to account for it

Didn't find your answer?

hi all

I have been looking at this and read through a number of threads on this. But still not sure about the substance of the transaction, and double entries for elements involved including VAT. 

The company entered into below lease agreement and has got VAT invoice (listed here too). EDIT - pictures seem small so I uploaded onto Drive available as pictures to download..

The elements in the transaction:

1) owner of the business made 5k contribution towards deposit, there is a DLA with debit balance so I can use that to reflect this payment made personally

2) company paid 35k towards deposit so total deposit is 40k as shown on page 1 of the agreement

3) Payments are: 47 monthly payments of £850 and final rental of £52k 

Looking at the agreement, it looks like a finance lease as risks seem to sit with the lessee because of:

- requirement to maintain car in high repair state

- liability towards payments on termination - clause 7.1.3 requires minimum 80% payment of the figure of 91k in (e) – not sure if it is expected in such agreements

- final rental is payable by the company regardless of the value of the car that can be sold by the finance house - see clauses 15.1 and then 15.4 and 15.5, i.e. if Porsche do not accept car being in satisfactory order it can require final rental payment, or if it does accept, I understood that final rental is payable still, and then Porsche can sell it at whatever price it wants/can having received all payments under the contract. If I understood it, there is no dependency on market value of the car at the time of sale in future, company is still liable for the final rental, do you see it that way too?

so my questions are:

1) how do I account for VAT, at the outset? i.e. if VAT inclusive cost is 108k are double entries:

Cr Cash 35k

Cr DLA 5k

Cr Lease Obligations 50k (amortised into PL using effective interest method breaking down £850 monthly payments - excluding VAT - see below)

Dr Car 90k

Dr Input VAT 18k

2) The company is not in car rental business therefore it would be impossible to prove only business use of the car. The car is parked as owner's home. Therefore are we only able to claim 50% of the 18k above so the Car asset should increase by 9k?

3) then related question is what happens £850 monthly payments in terms of VAT

 (I asked Porsche to provide breakdown of £850 monthly payments, not received yet)

Thank you all.

Replies (23)

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By Ruddles
14th Jan 2024 22:32

It isn’t a lease. The clue is right at the top of the first page.

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Replying to Ruddles:
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By m_shukhrat
14th Jan 2024 22:41

Ruddles wrote:

It isn’t a lease. The clue is right at the top of the first page.

so would you say it is an operating lease agreement? Ignoring the title at the top of page 1, what are the risks lessor is taking in this agreement? i.e. do terms indicate that risks and benefits are sitting with the company rather than lessor?

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Replying to m_shukhrat:
By Ruddles
14th Jan 2024 22:42

Sigh. I said that it is not a lease. Is your eyesight failing? Read the heading of the document again. You can’t just ignore it.

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Replying to Ruddles:
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By m_shukhrat
14th Jan 2024 22:45

Ruddles wrote:

Sigh. I said that it is not a lease. Is your eyesight failing? Read the heading of the document again. You can’t just ignore it.

not at all, so how would you double account for initial recognition and subsequent payments? what else would you call this agreement if neither operating or finance lease arrangement I wonder.

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Replying to m_shukhrat:
By Ruddles
14th Jan 2024 22:51

Geez.

Read the heading - again. And again if necessary. And yet again until it sinks in.

And/or engage an accountant.

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Replying to Ruddles:
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By m_shukhrat
14th Jan 2024 23:03

Not helpful, and may be leave for others to enlightning the blind. otherwise would be grateful for one or two liners to explain your point.

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Replying to m_shukhrat:
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By FactChecker
14th Jan 2024 23:12

The first line of first page (images you've posted).

H-I-R-E
P-U-R-C -H-A-S-E
etc

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Replying to FactChecker:
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By m_shukhrat
15th Jan 2024 00:27

Again, in the context provided, are you able to sign post on VAT treatment at the outset? or more helpfully provide some context that are you thinking when writing capitlsied two word answers? I looked up searches in relation to Hire Purchases, they point to most likely being finance lease as opposed to operating lease. Example: https://www.accountingweb.co.uk/any-answers/vat-hire-purchase

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Replying to m_shukhrat:
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By Cylhia66
15th Jan 2024 07:37

Hire purchase = car has been purchased
Lease = car is being lent

It's like when they say "it does what it says on the tin".

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Replying to m_shukhrat:
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By rmillaree
15th Jan 2024 08:54

"Again, in the context provided, are you able to sign post on VAT treatment at the outset?"

there is no vat reclaim (presuming this is not as pool car - this wont be a pool car !!) - you are blocked from claiming vat on car purchases - for vat purposes this is clearly purchase on hp - not a lease for reasons others have said.

if you dispute the facts over whetehr it should have been hp or lease (its clearly hp) you would need to take that up with hp company - they need to keep all the detail that confirms why this needs to be treated as hp and not lease.

Thanks (1)
Replying to m_shukhrat:
By Ruddles
15th Jan 2024 09:17

m_shukhrat wrote:
I looked up searches in relation to Hire Purchases, they point to most likely being finance lease as opposed to operating lease.

For the very last time (as far as my wasted time is concerned) a hire purchase agreement is neither a finance lease nor an operating lease. I don't like to shout, but hire PURCHASE.

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Replying to m_shukhrat:
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By rmillaree
15th Jan 2024 10:19

" I looked up searches in relation to Hire Purchases, they point to most likely being finance lease as opposed to operating lease"

the hp/lease company is obligated to keep calculatiosn detailing why they have treated it how they have treated it - they are clearly taking the opposite viewpoint that you are - they are obligated to keep their reasoning - if you have any issues you need to take it up with them as they are taking teh oppoipsite viewpoint from you - hopefully they can explain the reasons why.

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Replying to rmillaree:
By Ruddles
15th Jan 2024 11:00

I don't think that VW Finance are taking an "opposite viewpoint" as such. More a case of the OP not having a clue about leases and HP.

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Replying to m_shukhrat:
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By FactChecker
15th Jan 2024 13:58

Since you want 'signposting' in more than two words - try searching via Google.

A random answer to "Is a finance lease the same as a hire purchase?":
"a hire purchase is a "rent-to-own" agreement, while a financial lease is a "pay-to-borrow" arrangement."

Happy?

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VAT
By Jason Croke
15th Jan 2024 07:46

You/client appear to have bought a car, as in, owns the car.

That is what a hire purchase means and is what other posters are trying to explain.

The other massive clue is that you have a VAT invoice for the full value of the car, if it was a genuine lease hire/no ownership, the only VAT would be on the monthly rentals.

You can't reclaim VAT on a purchased car, there is an input tax block on it. Also, why is the question being asked now and not in September 2023 when the contract was entered into?

URGENT.... You have left the client name showing in the VAT invoice image so suggest you get admin to amend.

If you are an Accountant then you may have breached some client privacy, oops.

If you are posting as your own business, get an Accountant or book keeper because your question is something your average book keeper could deal with easily.

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Replying to Jason Croke:
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By David Ex
15th Jan 2024 10:08

Jason Croke wrote:

URGENT.... You have left the client name showing in the VAT invoice image so suggest you get admin to amend.

An extremely well known and long established company. I’d have thought they’d be using a larger firm to handle their financial affairs.

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Replying to David Ex:
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By FactChecker
15th Jan 2024 13:49

Maybe they feel they don't need to ... given that their LinkedIn page states:
"Our reputation is based on our ability to offer high quality training globally and we specialise in accountancy (ACA, ACCA, CIMA), IFRS and general business"!

Mind you, someone there's doing alright ... not many people in Education get that level of company car.

Thanks (1)
DougScott
By Dougscott
15th Jan 2024 09:05

And don't forget to claim 100% FYA on the cost of the car (including VAT!).

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By ireallyshouldknowthisbut
15th Jan 2024 15:24

Seriously no harm in saying "I am a bookkeeper, you need an accountant here" [of whatever your role is, maybe you are a qualified accountant but no little about tax or double entry, it happens in some roles]

I am a Chartered Accountant who works in practice, and told a client last year on a complex issue "I don't know the answer on XYZ, take specialist advice".

Today HMRC open an enquiry which had I muddled through would have me a in blind panic, instead I just shrugged and say to the client "lucky you took that advice",

Anyone who can afford a £100k car cant NOT afford to take proper advice.

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By m_shukhrat
15th Jan 2024 20:49

Thank you all who adequatly helped witout froth coming out of mouth - I thanked you all...I did actually found relevant notices on HMRC's website such as Notice 700/64 and 701/49. But I'm amazed how negative some of the replies are here, shocking. I greatly follow articles here, but hardly post to get answers.

As for the others, seriously? do you get a kick from putting others down? don't worry your "smartness" won't help in few years when AI will make you redundant especially with that kind of people "skills". Was it hard to explain like Jason? Honestly guys, be kind and friendly, I have done nothing wrong by asking follow up replies to your arrogant remarks....

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Replying to m_shukhrat:
By Ruddles
15th Jan 2024 21:18

m_shukhrat wrote:
AI will make you redundant

Well perhaps if you had asked ChatGPT to explain the difference between hire purchase and leasing at the beginning everything that followed could have been avoided.

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Replying to Ruddles:
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By m_shukhrat
15th Jan 2024 21:36

finally, some sensible advice, having a good day I take it, atta boy!

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