Tax Relief on Hire Purchase Asset (Again)

Picking up from another accountant's work

Didn't find your answer?

Hi folks, I'll try to keep this brief as I know it's something which has been asked before but I want to be certain before going any further.

A client's previous accountant fell suddenly ill part way through completing their accounts so I am picking up from their work (something of a favour). In the year the limited company entered into a hire purchase agreement for an electric vehicle. 

Nominal deposit, £120k list price incl VAT, interest charge of £30k over 4 years with a seemingly compulsory balloon payment at the end of the term of £60k. The accounts which have already been drafted show a £120k asset capitalised, a £150k OS loan with prepaid interest to match. Payments allocated to the loan balance with interest released from the prepayment monthly.

The tax comp shows capital allowances claimed in full as an electric car purchase.

 

My question here is if the final payment being compulsory would allow this treatment, as from what I have read on this website so far, the above treatment is incorrect and no capital allowances are available.

 

Any help appreciated.

Replies (24)

Please login or register to join the discussion.

By Ruddles
22nd Mar 2024 16:00

Does the agreement actually say "hire purchase agreement"? I'll bet that it doesn't. (But I've lost many bets before)

Thanks (1)
Replying to Ruddles:
avatar
By AccountingBen
22nd Mar 2024 16:50

Yes, right on the top "Hire-Purchase Agreement". It's from Porsche Financial Services though this is apparently "a trading style of Volkswagen Financial Services (UK) Limited"

Thanks (0)
DougScott
By Dougscott
22nd Mar 2024 16:51

I'm not really up-to-date on car finance arrangements but I've not heard of a hire purchase deal like this but it may of course be possible, but is the balloon payment capital or just a charge?

Anyway assuming it is an HP Agreement then of course you can capitalise the capital cost and releive it with 100% AIA (assuming it is a new car) and then the interest payments and balloon payments are revenue costs

Thanks (0)
Replying to Dougscott:
By Ruddles
22nd Mar 2024 16:55

I doubt very much that the balloon payment will be revenue - it is probably there to reduce the monthly payments. The revenue ('interest') element will simply be the difference between the price of the vehicle and the total amounts payable.

Thanks (0)
Replying to Ruddles:
RLI
By lionofludesch
23rd Mar 2024 07:42

Ruddles wrote:

I doubt very much that the balloon payment will be revenue - it is probably there to reduce the monthly payments. The revenue ('interest') element will simply be the difference between the price of the vehicle and the total amounts payable.

No. It's to bully you into buying a new car.

Thanks (1)
Replying to lionofludesch:
By Ruddles
23rd Mar 2024 09:28

How? By reducing the monthly payments, perhaps?

Thanks (0)
Replying to Ruddles:
RLI
By lionofludesch
23rd Mar 2024 10:30

Ruddles wrote:

How? By reducing the monthly payments, perhaps?

Sort of. But the thought of paying £60k is probably more of a reality check than a few quid a month.

Thanks (1)
Replying to lionofludesch:
avatar
By Paul Crowley
24th Mar 2024 01:04

Agree
Big lumps are a challenge

Thanks (0)
Replying to Dougscott:
avatar
By AccountingBen
22nd Mar 2024 16:57

The capital cost would surely include the balloon payment though wouldn't it? The vehicle costs £120k and the finance (excluding interest which will be a revenue expense) will total £120k, it's just that £60k is payable over 4 years and the last £60k on the last day of the agreement.

Thanks (2)
Replying to AccountingBen:
DougScott
By Dougscott
23rd Mar 2024 11:07

Yes now that you explain it the final payment is capital however you can claim AIA on the full capital cost at the date of the start of the agreement.

Thanks (0)
By Ruddles
22nd Mar 2024 16:52

Another lost bet. In addition to the balloon payment is there the usual option to purchase fee?

Thanks (0)
Replying to Ruddles:
avatar
By AccountingBen
22nd Mar 2024 16:55

Yes £10 option to purchase fee

Thanks (0)
Replying to AccountingBen:
By Ruddles
22nd Mar 2024 16:56

In which case I'd say capitalise (and claim CAs on) the £120k.

Thanks (1)
Replying to Ruddles:
avatar
By AccountingBen
22nd Mar 2024 16:57

Thank you

Thanks (0)
avatar
By bettybobbymeggie
22nd Mar 2024 17:27

Some background reading here:

https://www.gov.uk/hmrc-internal-manuals/business-leasing-manual/blm39010.

HMRC's view on the availability of capital allowances is based on whether the balloon payment is less than the expected market value of the car at the time the payment is due so if your £120k car will be worth more than £60k in four years then I believe you'll meet their interpretation of the requirements of s67 and capital allowances are available.

Thanks (0)
Replying to bettybobbymeggie:
By Ruddles
22nd Mar 2024 18:48

Correct outcome, wrong analysis. It is the £10 option payment that needs to be compared to the MV.

Thanks (0)
Replying to Ruddles:
avatar
By bettybobbymeggie
22nd Mar 2024 19:03

Hmm. I'd suggest it is HMRC's view (at least from reading this guidance) that the total cost of exercising the option to buy the asset is £60,010...£10 for the option and £60,000 to exercise it.

Thanks (0)
Replying to bettybobbymeggie:
By Ruddles
22nd Mar 2024 19:11

I’d suggest that is nonsense. The balloon payment is nothing more than that - a large instalment at the end to reflect the fact that monthly payments were lower than they would otherwise have been. The cost of exercising the option (to take ownership) is £10.

Thanks (0)
Replying to Ruddles:
avatar
By bettybobbymeggie
22nd Mar 2024 20:03

Are those idiots at Croner-i also talking nonsense:

https://www.cronertaxwise.com/community/my-vip-tax-team-question-of-the-...

Thanks (0)
Replying to bettybobbymeggie:
By Ruddles
22nd Mar 2024 20:19

No. You are misinterpreting that guidance as well. In particular, the nature of the balloon payment. Do you understand the difference between a contractual obligation and an optional payment?

You might try and argue that the client might choose to not pay the balloon payment and walk away. That doesn’t make the payment optional for the purposes of the tax treatment.

Thanks (0)
Replying to Ruddles:
avatar
By bettybobbymeggie
22nd Mar 2024 20:26

Well, look I'd agree with you but then we'd both be wrong.

Thanks (0)
Replying to bettybobbymeggie:
By Ruddles
22nd Mar 2024 20:42

What makes you think that the £60k is a payment required to exercise the option to purchase, given that the agreement specifically includes a £10 option payment?

The balloon payment referred to in HMRC’s guidance is effectively a larger version of that option payment. You are also completely overlooking the fact that in HMRC’s example they are talking about a finance lease and not an HP agreement.

Why are you treating the balloon payment differently from the final instalment of any other HP agreement just because it happens to be larger? You seem to be arguing that the £60k needs to be paid before the option to purchase can be exercised. That could be said to be the case for the last instalment of any HP agreement.

As I said, we are agreed on the conclusion but not on how we get there. The key point is that the option payment (£10 in this case, not £60k) is lower than MV.

For the last time, if you can’t understand that the £60k in this case is not an option to purchase payment there’s no helping you.

Thanks (0)
Replying to bettybobbymeggie:
avatar
By Paul Crowley
22nd Mar 2024 23:50

I am with Ruddles
HP is HP This has an option price of £10.
The croner i thing does refer to optional balloon payment rules that can bring PCP into HP territory.
IRL I do not usually look much further than how VAT is applied.
This is purely about timing of tax relief, not quantum.

Thanks (2)
avatar
By Bobbo
22nd Mar 2024 18:14

AccountingBen wrote:

The accounts which have already been drafted show a £120k asset capitalised, a £150k OS loan with prepaid interest to match. Payments allocated to the loan balance with interest released from the prepayment monthly.

Presumably as part of finishing off the accounts you will be reducing prepayments and the "loan" balance by 30k and doing the accounting properly.

Thanks (0)