UK Tax Treatment of Finance Lease Payments

UK Tax Treatment of Finance Lease Payments

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Having spent many years accounting for finances leases and doing tax computations we were horrified to discover yesterday that we have been doing it all wrong!

Historically, we have added back lease interest, dpn and profits/losses on disposal and replaced them with a deduction for lease payments including irrecoverable VAT less rebates.  

By referencing HMRC website at BIM61120 we find that so long as SSAP21 was adhered to that there was no need to add back those items and replace them with a calculation referencing the net rentals.

By the end of the lease there will be no difference between the deductions although there is likely to be a timing difference at any point in time.

Having taken advice from other accountants and tax advisors we have concluded that our historic approach was acceptable and that many business continue to account for finance leases in this way.  We are stunned that we were unaware of this as the rules date back to 1991 and wonder why.  We acknowledge that the rules were implemented as an anti-avoidance strategy.

What I am now concerned about is whether we need to disclose this to HMRC and redo the tax comps as described in BIM or whether HMRC accept that the adjustments we have made are acceptable.

Secondly, the reason this came up is because the FD of our client asked whether the initial payments should be spread over the life of the lease/asset or if it is acceptable to account for those in the period paid?  I'd appreciate an opinion on this too.

With thanks, in dismay.

Replies (5)

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By johngroganjga
30th Oct 2014 13:53

You don't need to do anything retrospectively because, as you say, the end result is the same either way.

Yes you are still doing it the way everyone used to do it.  But presumably you will now adopt the other method going forward.  It's simpler after all.  The hardest part is remembering not to add back the depreciation, which goes against the grain.

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By carole.businessheads
31st Oct 2014 08:59

Thank you John, absolutely, so much simpler, if only we'd known.  I've been talking to colleagues and haven't yet found anyone who was aware of this and they are all shocked at the idea of not adding back dpn etc.  Its a new paradigm!

Do I still have a retrospective issue over allowing deduction of the initial payment in the period it was paid?  Should we have spread this over the period of the lease?  Once again this is a timing difference but is likely to be significant over a fleet of about 20 cars which change every 3-4 years.

With thanks

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By johngroganjga
31st Oct 2014 09:45

No I wouldn't be going back into the past.

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By tonyaustin
04th Nov 2014 18:42

Revenue or capital?

The question of whether something is revenue or capital is a matter of general law, not accounting practice, so revenue expenditure can be put on the balance sheet and written off over a period but remains revenue, even if then called an asset on the balance sheet and depreciation in the P&L account.

The tax treatment of revenue expenditure, unless there is specific legislation such as for loan relationships or entertaining, is the same as the accounting treatment. It is deductible as a trade expense when it is charged to P&L account.

There is no tax relief for capital expenditure against trading income except under specific legislation such as for capital allowances.

A leased asset is rented, which is revenue expenditure, unless there is an option to acquire it at the end of the lease, when it is treated for tax purposes as purchased for the full cash price (capital) with charges and interest (revenue).


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Replying to DJKL:
By carole.businessheads
05th Nov 2014 09:05

Thanks Tony, I understand the premis but had always used the 'add back' method.  Having found SP3/91 I know where that comes from and the whole thing becomes clear!


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