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Hire purchase agreement

Hire purchase agreement- accounting treatment when the asset is not purchased

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Hi everyone 

I have 2 questions rearding the Hire purchase agreement: 

1. My client has had a car on hire purchase agreement for 2 years. When the contract came to an end, he had a choice- either buy it out for nearly 28 k or return it to the dealer. He chose the second option. My question is, what is the accounting treatment I should follow to remove the outstanding balance on Creditors/ HP>1 year? I have already removed the asset and the accumulated depreciation from accounts but the balance on Creditors is still outstanding.

2. He got a new car from the dealer on Hire purchase agreement again but told me that what he has paid for the old car (around 27k) has been lost as as soon as he returned the car and he paid a separate deposit for the new car. Should this amount be moved to costs? 

 

Thank you in advace for your help 

Replies (36)

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d
By puzzel
29th Jul 2019 22:30

So was the first HP actually a rental with an option to buy at the end?
Was the monthly payments including interest charges. The OP does not tell us this. I did look at their figures and could not make sense. It is not you or I that has problem, we might treat it towards the best interest of our client. But without the correct information you are in limbo.

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By CelinaC
29th Jul 2019 16:43

The contract states it was a hire purchase agreement with an option to buy at the end

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By SXGuy
29th Jul 2019 16:50

So the option to buy was probably in fact a balloon payment then.

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RLI
By lionofludesch
29th Jul 2019 16:56

1. Sounds like he sold the car to the finance company for £28k.

2. I don't understand this one. Are you saying he's paid a separate deposit on a new HP agreement ? If that's the case, the details will be on the agreement.

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Replying to lionofludesch:
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By CelinaC
29th Jul 2019 17:01

Yes, I have the new agreement where he paid £20000 deposit for the new car (out of the business bank account). The details of the new deal are all on there, it's about the old agreement that I'm not sure what to do about.

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By CelinaC
29th Jul 2019 16:57

Yes. The exact figures on the invoice were:
Grand total- £50995
VAT- £8456.67
Deposit paid- £20398
Amount of credit: £30597
Duration of Agreement- 24 months
23 monthly repayments of £362.81
Optional Final Repayment: 28373.60

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Replying to CelinaC:
RLI
By lionofludesch
29th Jul 2019 17:03

Yeah, it's just a new HP agreement.

He can either pay £28k in two years' time or sell the car back to the finance company.

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By puzzel
29th Jul 2019 18:38

So, excuse me (hate using mobiles). The initial vehicle value is deposit plus the hp payments. Final option to purchase should have been ignored. Dr vehicle addition and credit hp/loan account.
As each payment is made, credit bank and debit hp/loan account. Naturally adjusting for the hp interest and capital allowances.
He would not sell the car back to the hp company, as he had never paid that amount.
Final or a balloon payment when made is when you would actually own the vehicle.

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Replying to puzzel:
Psycho
By Wilson Philips
29th Jul 2019 18:42

To clarify, you would include the balloon payment when initially capitalising costs. It is the (usually) nominal option to purchase fee that would be ignored.

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Replying to Wilson Philips:
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By puzzel
29th Jul 2019 20:12

But why would you include a balloon payment, when you might not actually pay it. It can have a big negative on the overall tax liability.

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Replying to puzzel:
Psycho
By Wilson Philips
29th Jul 2019 23:05

Why would you include any payment beyond the first as you may not pay them? Including the balloon payment can also have a significant positive tax impact.

With an HP agreement there is a presumption that the trader is going to purchase the asset (the clue is in the title), making all payments. It would be inappropriate (or just plain wrong) to recognise anything other than the cost of the asset.

A large balloon payment is nothing more than a way of reducing the monthly payments. It doesn’t change the total amount that needs to be paid to acquire the asset, and on which capital allowances are available (assuming that it’s a qualifying asset)..

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Replying to puzzel:
RLI
By lionofludesch
29th Jul 2019 18:51

puzzel wrote:

So, excuse me (hate using mobiles). The initial vehicle value is deposit plus the hp payments. Final option to purchase should have been ignored. Dr vehicle addition and credit hp/loan account.
As each payment is made, credit bank and debit hp/loan account. Naturally adjusting for the hp interest and capital allowances.
He would not sell the car back to the hp company, as he had never paid that amount.
Final or a balloon payment when made is when you would actually own the vehicle.

I very strongly disagree.

This is just a hire purchase account with a big final payment.

If the option fee was a tenner, you wouldn't capitalise the asset at £10.

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By puzzel
29th Jul 2019 19:59

But if you did not make the final purchase value, what would happen with an error of claiming a capital allowance that you are not entitled to.
Do the hp payments include an element of interest over the period of payment, before the settlement/balloon payment?.
Is it just a car/delivery vehicle or a hurst? Dual usage?

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Replying to puzzel:
Psycho
By Wilson Philips
29th Jul 2019 20:59

If you don’t make the final payment that doesn’t affect the capital allowances claim. If the asset is handed back then for tax (and accounting) purposes you’re treated as selling it for the balance due to the HP company.

Remember that the legislation creates a fiction whereby the purchaser is treated, for capital allowances, as owning the asset from day one despite not having legal title.

You need to read sections 67 and 68 of CAA2001.

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Replying to Wilson Philips:
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By puzzel
29th Jul 2019 21:06

But if the client does not make the balloon payment how will it effect their capital allowance claim?
Hey ho, no tax to pay this year as we have claimed first year allowance etc. 3 years later, sorry, because you did not pay the balloon payment you have a bigger tax liability.

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Replying to puzzel:
Psycho
By Wilson Philips
29th Jul 2019 21:43

Oh for goodness sake. It’s no different to making the balloon payment and then selling the asset the following day for the same amount.

As I said above, have a read of the legislation.

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By puzzel
29th Jul 2019 21:25

So if a local builder goes to an equipment hire station and got some scaffolding on hp, it do's not mean they will own the scaffolding. They may however have the option to purchase the scaffolding at maybe a reduced rate.
So could the monthly car payments not just be an expense, until the final balloon payment is made and then capitalised.

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Replying to puzzel:
Psycho
By Wilson Philips
29th Jul 2019 21:41

I give up. Does anyone else want to have a go?

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Replying to Wilson Philips:
RLI
By lionofludesch
29th Jul 2019 22:22

Wilson Philips wrote:

I give up. Does anyone else want to have a go?

I'll have a go.

Puzzel - if you bought a car for £50,000, would you claim capital allowances on £50,000 or £22,000 because you might, but not definitely, sell it for £28,000 in two years' time ?

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Replying to Wilson Philips:
By tonyaustin
31st Jul 2019 10:14

Nothing more to say. Puzzel is talking rubbish! I hope his clients don't buy on HP. The tax law is the law, has been for ages and the accounting treatment is per the appropriate standard. You could not have explained it more clearly.

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Replying to puzzel:
RLI
By lionofludesch
29th Jul 2019 22:25

puzzel wrote:

So if a local builder goes to an equipment hire station and got some scaffolding on hp, it do's not mean they will own the scaffolding.

For tax purposes it do's (sic).

There's legislation on it.

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By puzzel
29th Jul 2019 21:59

Don't give up please.
It is trying to understand the correct way of treating the hp(?) Payments, is interest included in the payments!, then it would be a loan for an asset.
We do not know this from the OP.
If no interest, then it is a rental. Both can be called an hp at the end of the day. No interest then rental, interest charged would be a loan and would in general refer to a loan to purchase an assett.
The final or balloon payment if made would be a purchase of an asset.

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Replying to puzzel:
Psycho
By Wilson Philips
29th Jul 2019 22:32

Last one then.

You have a fundamental misunderstanding and need to go back to the text books. A hire purchase agreement is an agreement to purchase an asset and pay in instalments. A hire of an asset is just that - use of an asset for an agreed term in return for periodic payments. A loan to purchase an asset is something different again.

Quite simply, you don’t appear to understand what hire purchase is. Until you do, you will never understand the tax and accounting treatment.

Existence (or absence) of interest is not determinative of anything - many HP agreements are interest-free, especially cars.

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Replying to Wilson Philips:
RLI
By lionofludesch
30th Jul 2019 10:14

Read Capital Allowances Act 2001, s67.

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Replying to lionofludesch:
Psycho
By Wilson Philips
30th Jul 2019 10:31

I did - what is your point?

(Bearing in mind that my comments above necessarily were of a general nature, covering the most common scenarios.)

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Replying to Wilson Philips:
RLI
By lionofludesch
30th Jul 2019 10:47

Wilson Philips wrote:

I did - what is your point?

The comment wasn't aimed at you.

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Replying to lionofludesch:
Psycho
By Wilson Philips
30th Jul 2019 10:50

:)

So, it was a repeat of my earlier advice to Puzzel?

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Replying to Wilson Philips:
RLI
By lionofludesch
30th Jul 2019 11:26

I saw it as a joint effort.

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Replying to lionofludesch:
Psycho
By Wilson Philips
30th Jul 2019 12:11

"Effort" being the operative word.

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Replying to Wilson Philips:
RLI
By lionofludesch
30th Jul 2019 12:26

We've only had Hire Purchase for 60 years. Some folk struggle with new stuff.

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Replying to Wilson Philips:
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By Vallery Lee
01st Aug 2019 12:14

Thanks for the clarity.

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By mumpin
30th Jul 2019 11:04

I remember Ruddles used to have terrible trouble understanding this.
What ever became of him?

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By Wanderer
30th Jul 2019 11:52

This thread reads like a wind up.

Bring back T accounts!

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By AdShawBPR
31st Jul 2019 09:53

This is a form of HP but if OP figures are correct, this is not a bargain purchase option so the tax and accounting treatment are not the same as an HP agreement with a bargain purchase option. At the start, there appears to be no 'likelihood' that the option will be exercised which means capital allowances would not be available to the hire purchasee. The sum of the mimimum hire purchase repayments clearly amounts to less than 90% of the asset's value and the asset should not therefore be shown on the balance sheet. The repayments should be accounted for on a straight line basis which would appear to be £362.81 per month. Caveat: Lease accounting rules have just changed and I can't claim to be completely across those at the mo.

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Replying to AdShawBPR:
Psycho
By Wilson Philips
31st Jul 2019 11:37

I agree that the agreement is more akin to a lease purchase contract, and therefore probably subject to the restrictions in s67.

For the avoidance of doubt, though, Puzzel is wrong in arguing that the payments, excluding the balloon payment, should be capitalised. It's all or nothing.

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By Husbandofstinky
31st Jul 2019 11:27

I really do hope that they see the light on this one. When the penny drops and there's that light bulb moment, happy days.

Really thought this was a wind up session though.

As for Ruddles.... it's been a while now.

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