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Finance leases & Capital Allowances

Finance leases & Capital Allowances

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If a company has purchased assets (commercial vehicles) under finance leases I understand they are denied capital allowances on the basis that they do not have ownership.

The assets are capitalised in the balance sheet like any other owned asset, with the corresponding liability reported as a liability and the finance lease interest charged to the profit and loss account.

How therefore is tax relief obtained by the company on these assets ??

I have read that "where the accounts have been prepared in accordance with accounting standards the accounting treatment will be acceptable for tax purposes and no adjustments to profit need be made. Where accounts have not been prepared in accordance with accounting standards, for tax purposes the rentals are deductible in computing profits under the accruals concept."

So what exactly does this mean ?? my understanding is simply that the interest/finance costs charged to the profit and loss account will be allowed together with the depreciation charge on the assets (HMRC BLM32505). But surely on this basis the tax relief can be manipulated and accelerated through the depreciation rate adopted which commonly is 25% reducing balance and so does not correlate to the finance lease term of say 5 years. Or should the depreciation rate be consistent with the finance lease i.e. 20% straight line ??

However according to HMRC BLM00525 the gross rentals (interest plus capital repayments) are deductible in the hands of the finance lessee which conflicts with the idea that tax relief is obtained on the depreciation charge and interest/finance costs.

How would this be correctly accounted for on the CT computation as ordinarlly the depreciation charge is added back as disallowable, and how would you include the gross rentals (if indeed this is correct) in the computation as these cannot be picked up automatically.

Would gratefully appreciate clarification as to the correct form of tax relief i.e. depreciation and interest/finance costs or gross rentals (interest + capital), and how this is practically claimed.

Many thanks.

Replies (7)

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By BKD
12th Oct 2012 23:23

A long question with a short answer

Provided that depreciation is calculated correctly (asset depreciated over shorter of economic life and term of lease) you simply claim a deduction for the depreciation and finance charge in the P&L. Yes, you could accelerate tax relief by increasing depreciation rate (provided there was commercial rationale for doing so) but it wouldn't affect the total relief available. Yes, strictly it is interest and capital that is deductible - the point being that depreciation will normally equate to the capital element of the payments, and HMRC will therefore accept the depreciation charge  as deductible.

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By pdorrington
15th Oct 2012 19:13

Not Quite That Simple ......

So following on from BKD's reply (thank you) which I understand, my situation is a bit more complex .........

If a client acquires the vehicle 'chasis' under a finance lease but then custom builds it into an 'on the road' vehicle what happens then ?? the client is capitalising the 'chasis' purchase price (under finance lease) and their own builds costs, so the depreciation and finance interest is NOT equal to the gross finance lease repayments (capital and interest).

Should these be separated for CT purposes i.e. add own build costs to Capital Allowances main pool and claim WDA, and allow finance interest and only a proportion of depreciation (on 'chasis') as a tax allowable deduction for CT purposes ??

Many thanks.

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By George Attazder
15th Oct 2012 21:06

If that's a finance lease for tax purposes...

... then I'll eat my cat!

How on earth is your client going to return the leased asset (the chassis) to the lessor (without their "build") at the end of the lease?

Does the "lease" contain any provision (whether or not it involves the exercise of an option) that would allow your client to retain ownership of the asset (whether or not for the payment of a fee) at the end of the lease?

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By pdorrington
16th Oct 2012 23:33

Confused ...........

HMRC accept (BLM00325) that not all leases that include an option to purchase are HP contracts (which are eligible to capital allowances).

BLM00330 refers to contracts containing a provision giving the hirer an option to purchase as HP or lease purchase contracts.

So in providing completely confusing (and sometimes contradicting) legislation as to what constitutes a HP agreement or other type of lease and whether they do or don't qualify for capital allowances, HMRC then seems to refer to the following overriding legislation :

CAA01/S67 applies to a lease contract where :

the expenditure is incurred under a contract providing that the lesses shall or may become the owner of the plant or machinery on the performance of the contract, andthe lessee incurs capital expenditure on the provision of plant or machinery for the purposes of a qualifying activity

So it would seem therefore that where a finance lease (or any type of lease) satisifes the above conditions you are eligible to claim capital allowances ??

CAA01/S67 refers to CA23310 and specifically HP or lease purchase contracts. So does CAA01/S67 simply provide clarity to the eligibility of capital allowances for HP or lease purchase contracts or can this be adopted for ANY type of lease (including a finance lease) where the conditions are satisifed ??

Or am I missing something here ??

 

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By George Attazder
17th Oct 2012 09:45

Lease purchase...

... is an oxymoron. The guidance you seek is at BLM39010, specifically the pre-penultimate paragraph.

A lessor of an asset (other than land) generally won't permit the lessee to carry out any alterations to the asset that cannot be readily undone.

Should I throw Felix on the barbie?

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By shahih
25th Jul 2013 13:36

finance lease and deferred tax

what would you report as deferred tax liability on finance leases as a deferred tax asset?

 

I understand it is the obligation under finance leases: within one year and one to five years added together multiplied by the tax rete?

 

many thanks

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By Accountant 001
14th Mar 2016 16:13

Loss on Leasehold Vehicle

 

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