Finance Lease currently treated as depreciation claim x 25% of 47 rental payments apportioned to 7/12ths because the company had use of the vehicle from the end of March to the end of October (year end). Therefore £10,281.00
Details:- Finance Lease signed end March.
Per Lease agreement the primary hiring period = 43 months
Minimum lease payments (per a recent letter enclosing interest details) = 42
Cost = £54,000 net of VAT
Interest = £17998.55
According to Agent the Lease period is 48 months and the 6 up front lease payments do not reduce this period although they are itemised by the Lessor as 1 initial rental commencing 7/4/11.
Monthly rental =1499.97
Interest started around £750 for 1st initial rental (although this had been treated as 6 primary rentals) reducing over the 43 rentals to 0 and totalling £179998.55.
As this has taken the sole trader into the 40% tax bracket I would like to be able, to argue, with reference to FRSSE that the accounts be changed.
Replies (4)
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I disagree with the FRSSE
The Standard requires that finance charges should be calculated so as to give a constant periodic rate of return on the outstanding obligation. Although the FRSSE says that a straight-line calculation gives a reasonable approximation of that rate of return, I disagree. And in any event, there is no requirement to use a straight-line calculation.
You should depreciate the asset over the shorter of the asset's useful economic life and the term of the lease - the number of payments (48 or 43) is therefore irrelevant.
Based on your numbers above, I calculate the deduction for the 7 months as being £12,696:
7 months' interest £4,821 (I can't see where you get £5,500 from)
7 months' depreciation £7,875
That is based on the 48-month term of the lease. If you can demonstrate that the economic life is shorter, you could increase the depn element, but I don't think the interest charge is affected.