Treatment of finance lease with balloon payment

Treatment of finance lease with balloon payment

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Can anyone help with this one please?  A self-employed client has bought a van under a 4 year finance lease with a balloon payment.  I have very few details and haven't seen the lease document, as the client insists I have all the information sent to him, which basically consists of the original order summary.  He has paid a deposit, plus VAT and is making monthly payments plus VAT.  These amount to £21068 excluding VAT.  The balloon payment is £10148 plus VAT.Is this a finance lease or an operating lease?  ie, can I claim capital allowances (and if so how do I arrive at the value of the vehicle purchased:?) or are the payments treated as revenue expenses?  Thanks.

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By tonycourt
23rd Oct 2013 16:34

Typical client! No paperwork

If it's a finance lease or an operating lease neither will result in your client owning the van and so they aren't buying it. Consequently CAs can't be claimed. The rent paid is a revenue expense. 

Neither is the lease is not a long lease, therefore it shouldn't be capitalised in the accounts.

Because the invoices show VAT this confirms it's not a lease purchase - so it's a rental arrangment and therefore my comments in the first paragragh above are apply.

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By JCresswellTax
24th Oct 2013 09:35

Ah but

If its a finance lease, under SSAP 21, the lessee (trader) is required to treat a finance lease in the same way as had he bought the asset by way of a loan. The trader will therefore depreciate the asset over its normal life and will therefore charge depreciation and interest payments through the P&L account.

The depreciation will not be added back in tax comp.

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By User deleted
24th Oct 2013 09:47

Ah but (2)

We've been told that the monthly payments are plus VAT - but are we certain that's correct? If there's no paperwork how can we be certain that the agreement is not an HP agreement and that all VAT ought to have been claimed upfront? Balloon payments have been seen in finance lease agreements but are more typically found, in my experience, in hire/lease purchase agreements.

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By User deleted
24th Oct 2013 13:29

If it's an option to purchase

Then it isn't a lease. I think you should insist on seeing the agreement - if your client has lost it, he should be able to obtain a copy.

Unhelpfully, the HMRC guidance referred to discusses only the accoutning treatment of such agreements, it makes no mention of the tax treatment.

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By tonycourt
25th Oct 2013 10:03

Finance lease no option to buy

While common practice is for the leasee of a finance lease is to purchase the vehicle at the end of the contract this is quite deliberately and necessarily not a right. The purchase is arranged through a third party, often a car dealership, who will take a small fee for their trouble. 

If there is a right to buy then it is a lease purchase and same tax rules as an outright purchase, or hire purchase apply, otherwise it's treated as rental payments.

http://www.hmrc.gov.uk/manuals/bimmanual/bim61105.htm

 As BKD says there is a difference between the accounting treatment (SSAP21)  and tax treatment.

Also as BKD says client can surely obtain a copy of the contract - or failing that give you permission to write to garage/finance company.

 

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By SoL
25th Oct 2013 10:01

If there's VAT on the payments, doesn't this suggest rental (akin to an operating lease) rather than HP or a finance lease?

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By Mrs Mac
25th Oct 2013 14:33

Finance lease

Thanks to everyone for your help.  The good news is that I've managed to obtain a copy of the agreement.  There is no 'option to buy' at the end of the primary period and there is no secondary period.  In fact it states that the vehicle will be sold at the end of the agreement period either by the leasing company or the client.  If sold by the client it has to be to an unconnected third party.  In conclusion, I am treating this as a lease arrangement rather than a purchase and the monthly rental payments as revenue expenses.

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