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taxadvisor.uk
taxadvisor.uk, Chartered Certified Accountant
Category: Tax
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Experience:  FCCA - over 35 years experience as a qualified accountant (UK based Practitioner)
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We are a small limited company, VAT registered and looking

Resolved Question:

HiWe are a small limited company, VAT registered and looking to purchase a new truck for the business. We are trying to decide what finance package is most suitable, ie Lease Purchase, Finance Lease, and wish also to understand which is most corporation tax efficient and whether all of the rental payments can be set against profits. Currently we do not have an accountant.
Submitted: 14 days ago.
Category: Tax
Expert:  taxadvisor.uk replied 14 days ago.

Hello and welcome to JustAnswer. I am here to help you. I am reviewing your question and will respond to you shortly.
Many thanks

Expert:  taxadvisor.uk replied 14 days ago.

Thank you for your question..

Basic difference between the two

Under finance lease you are paying an equivalent to monthly rental and the whole lease rental is shown as expenditure in your books and deductible against profits.

With lease purchase (hire purchase), you would expense the hire purchase cost (interest) in your books and depreciate the assets over its useful life. Although depreciation is disallowed for tax purposes, you would claim capital allowance against the cost of the truck in arriving at corporation tax liability.

You should look at both options and consider what is best based on overall cost to the company and financial well being of the company.

You may find information here helpful in both understanding the differences and making your choice

https://efinancemanagement.com/sources-of-finance/difference-between-lease-financing-vs-hire-purchase

http://www.wessexvc.co.uk/hirepurchase_leasepurchase.html#_top

If you intend to use the vehicle for longer period, I would consider lease puchase (hire puchase).

I hope this is helpful and answers your question.

If you have any other questions, please ask me before you rate my service – I’ll be happy to respond.

Customer: replied 3 days ago.
could you please explain in basic terms how we enter Finance Lease and also Lease Purchase in the company accounts, particularly P&L , balance sheet and whether the assets would be shown under tangible assets or as annual investment allowance.Thank you.
Expert:  taxadvisor.uk replied 3 days ago.

Thank you for your reply.

If you have a finance lease whereby you are paying a monthly rental over a period of time, you could expense this rental payment in profit & loss account under heading Rental payments for vehicle.

If you buy the truck under HP agreement then your profit & loss account would show two types of entries -

- hire purchase interest

- depreciation on motor vehicles

In the balance sheet you would show

- the cost of the truck as a tangible fixed asset under motor vehicles

- the amount borrowed on hire purchase as HP creditor within current liabilities and creditors amounts falling due after more than one year.

I hope this is helpful and answers your question.

Customer: replied 3 days ago.
The reason for the questions is because our VAT registered limited company is looking at buying a new truck. Just to clarify, with finance lease it will be our companies responsibility to sell the vehicle and settle any 'balloon' payment. your answer implies that there is no need to include the vehicle under Tangible Assets and writing the cost down over 4 years. Is that correct. Sorry to ask such basic questions.
Expert:  taxadvisor.uk replied 2 days ago.

Thank you for clarifying your obligations under the lease.

As your company will have the responsibilty of selling the vehicle and settling the ballon payment, your company is effectively taking over substantially all the risks and rewards incidental to ownership of an asset. This being the case, you would capitalise the finance leased asset. Attached is document showing detailed accounting required. Look at Finance Lease accounting both for initial accounting and subsequent accounting. Look here

http://www.accaglobal.com/ca/en/student/exam-support-resources/fundamentals-exams-study-resources/f7/technical-articles/accounting-for-leases.html

taxadvisor.uk and other Tax Specialists are ready to help you
Expert:  taxadvisor.uk replied 2 day ago.

I thank you for accepting my answer.

Best wishes