How accounting and tax works for:
With a finance lease, the asset is capitalised in the balance sheet with an equal liability created.
The repayment is split between capital & interest (this split is created using your normal method for all other hire purchase or similar agreements) with the capital amount reducing the liability and the interest element going in the profit & loss account as a cost.
Then depreciation is applied to the asset (due to this being a finance lease HM Revenue & Customs allows this as your taxable deduction and does not need adding back as you would with normal depreciation) on the basis of the lower of the life of the asset or the term of the lease. This amount goes in the profit & loss account as a cost.
The combination of the above two items effectively allows you to claim 100% of the repayments against taxable income.
At the end of the year in the filed accounts, a note is added under the fixed asset schedule itemising the value of the assets held under a finance lease and the depreciation applied to these assets. The liability is split between current (due within one year) and long term (due in more than one year).
More information about finance leases can be found here.
With hire purchase, lease purchase and loans, the asset is capitalised in the balance sheet with an equal liability created. The repayment is then split between capital & interest (the split is created using your normal method for all other hire purchase or similar agreements) with the capital amount reducing the liability and the interest element going in the profit & loss account as a cost.
Then depreciation is applied to the asset using your normal depreciation rules for this type of asset. When calculating your taxable income you will need to add back the above depreciation and effectively replace it with the Capital Allowance (This figure is the tax saving associated with owning the asset, the government allows each business to claim back against taxable profits an amount known as capital allowances, these capital allowances are calculated on a reducing balance and can vary due to the asset from 6% to 18%.
More information about Hire Purchase can be found here.
With an operating lease, each repayment goes into the profit & loss account as a cost. Operating leases have a residual value built into them and do have to meet official accounting rules.
More information about operating leases can be found here.
In some circumstances, organisations may also be able to claim an Annual Investment Allowance (AIA).
If your business buys a piece of equipment that qualifies for the AIA, you can deduct 100% of the cost of that asset (up to £1,000,000) from your business’s profit before you work out how much tax is due on that profit.
If your business is registered for VAT, you claim the Annual investment allowance on the total cost of the asset less any VAT you can reclaim on that asset. If your business is not registered for VAT, you claim the AIA on the total cost of the asset. If you sell the item after claiming AIA you may need to pay tax.
AIA is available for companies, individuals and partnerships, where all the members are individuals.
At the end of the year in the filed accounts the liability is split between current (due within one year) and long term (due in more than one year).
In addition to the AIA, certain assets will qualify for 100% first year allowances, which means you can deduct the full cost from your profits before tax. However, you cannot claim 100% first year allowances and AIA for the same expenditure.
Please note: All the information is to be taken as a guide only, your accountants/auditors will provide you with exact treatment based on your individual organisation.
We know finance can be complex and often it's easier to talk things through. Drop us a message or give us a call 0330 135 8660 and we'll get back to you ASAP.
Our team are here for you, let us show you what we can do!
By filling out this form, you agree to the terms laid out in our privacy policy
.png)
