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.