Van cost £19,500+VAT, but charged to finance company less small deposit paid by client.
Finance company supplied "Finance Lease" document listing an advance payment of £3,286+VAT, followed by 35 rentals of £276.79+VAT monthly. In month 36 they want £10,000 odd + VAT. Minimum hire period is 36 months. The rentals payable dueing the Secondary Period will be £8.33+VAT payable annually in advance.
I assume that for at least 35 months this is a rental agreement, and will remain so even when the balloon payment is made.
Do you agree that the only time I would treat the vehicle as a fixed asset is if client confirms they have "bought" it?
I'm guessing that at the end of the 36 months they will be offered another vehicle/hire agreement, but I don't know. Client not able to give me much more info.
Replies (11)
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The test in FRS102 is whether the lease transfers substantially all of the risks and rewards of ownership. I would argue that it does:
- the lessee has unfettered use of the van for the lease term (has all of the rewards)
- the lessee (presumably) has to maintain and insure (most of the risks)
- the lessor is effectively underwriting the value of the van at the end of the term. But given that used vehicles have fairly predictable values, this is low risk. The lessee may also be obliged to pay excess mileage charges and for any end of term repairs.
On this basis, the van should be capitalised from acquisition.
I'm not a tax specialist but I would follow the accounts treatment and claim capital allowances and the (inferred) interest.
Bad enough but even worse is explaining to a sucontractor using a company why his balance sheet says he has a van that he does not own.
There's no agreement to purchase, so no capital allowances. It will boil down to either capitalising as a finance lease - and claiming depreciation and 'interest' - or expensing as an operating lease.
I posted a similar query three years ago and received the following advice:
Does the contract provide that the purchaser shall or may become the owner of the car, and does the contract fall to be treated as a finance lease under GAAP?
If you have two yes reponses, then all of the payments under the contract are treated as made when the car begins to be used for the purposes of the business.
CAA 2001, s 67.
Regards
Hard to see if there will be an option to purchase if there is a secondary rental period.
It is described as, and sounds like, a finance lease to me.
If its a finance lease, and no option to buy. You have your answer.
Can go back and forth picking at finer points all day, doesn't change the fact.