HP and finance leasing

By Tolley
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The following Corporation Tax guidance note by Tolley provides comprehensive and up to date tax information covering:

  • HP and finance leasing
  • Assets bought on hire purchase
  • Leasing costs
  • Long funding leases
  • Car leasing ― lease starts before 1 April 2009
  • Car leasing ― lease starts on or after 1 April 2009

This document covers these in detail, along with their tax treatment; difference between an operating and a finance lease; long funding leases; car leasing pre/ post-April 2009 and changes post April 2013.

 

Assets bought on hire purchase

If an asset (eg a machine) is acquired via a hire purchase (HP) agreement, legal ownership of the asset passes to the company at the date the contract is signed. The company will simply pay for the asset over a period of time, normally on a monthly basis.

Monthly HP repayments will contain both an interest and a capital repayment element. The capital element is not an allowable deduction. The interest is a deductible expense.

Capital allowances may be claimed on the capital cost of the asset from the date the HP contract was signed (see below).

Leasing costs

Contrast an HP agreement with a leasing arrangement where a company is borrowing an asset owned by someone else.

Costs incurred in leasing or hiring an asset to be used in the trade will be allowable.

There are two ways in which a company will lease an asset and account for it under UK GAAP:

  • operating lease ― here the company simply pays a rental payment (normally monthly) to the owner of the asset and deducts the lease payments via the P&L account
  • finance lease ― the lessee (company) is required to treat a finance lease in the same way as had it bought the asset by way of a loan. The company will therefore depreciate the asset over its normal life and will therefore charge depreciation and interest payments through the P&L account.

In both instances, the asset is being borrowed from someone else (ie no legal ownership changes hands), so no capital allowances can be claimed by the lessee using the asset.

There is therefore a difference between an operating lease and a finance lease in respect

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