Ever wondered should you HP, Buy or Lease busines assets?
The decision to buy, hire purchase, or lease an asset will generally depend on the financing available to your business.
There are different treatments for tax and accounting purposes, depending on the type of finance contract entered into, and these will need to be considered together with the VAT treatment.
This section covers outright purchase for cash or by bank loan, etc.
The asset is capitalised in the balance sheet and an annual charge for depreciation is deducted as an expense in the profit and loss account, which in turn reduces the value of the asset in the balance sheet.
The annual depreciation charge is calculated in accordance with accounting standards, based on the useful economic life of the asset and the residual value.
Depreciation is not allowed for tax purposes, but capital allowances are available. The first £100,000 of investment in plant and equipment (not cars) each year attract an annual investment allowance (AIA) of 100%. Any annual expenditure over £100,000 enters either the 10% pool or the 20% pool, attracting a writing down allowance (WDA) at the appropriate rate.
Any business that invests in energy-saving or environmentally beneficial equipment is entitled to claim a 100% FYA. Cars with CO2 emissions of up to 110 g/km also qualify for a 100% FYA. Cars with CO2 emissions of more than 110 g/km and up to 160 g/km are allocated to the main pool and attract 20% WDA. Cars with CO2 emissions exceeding 160 g/km enter the special rate pool and attract WDA at only 10%.
With effect from 1 April or 6 April 2010, there is a new 100% capital allowance for the purchase of new, unused (not second-hand) vans, which cannot produce CO2 emissions under any circumstances when driven (eg “electric vans”).
Unless the asset is a car, the VAT shown on the supplier’s invoice will generally be recoverable by the purchaser, if he or she is registered. Buying at the beginning of a VAT period will entail a wait of three months or more to recover the tax. VAT on cars is recoverable only in very rare circumstances.
An HP agreement usually includes an option to purchase at the end of an initial period. Payment of this nominal fee transfers title of the asset and brings the legal agreement to an end.
The asset is treated as if it had been purchased. It is, therefore, capitalised in the balance sheet and depreciation is provided on an annual basis.
The obligation to pay future instalments is recorded as a liability in the balance sheet.
The payments are apportioned between a finance charge and a reduction of the outstanding liability.
The total finance charge should be allocated to accounting periods during the HP term and is shown as an expense in the profit and loss account.
Capital allowances are available. See “Buy” section above for details.
The finance charge in the accounts is normally allowed against tax.
VAT charged by the finance company will be payable with the initial instalment. There will be a delay of up to four months in recovering this from HM Revenue & Customs. In the case of a car, most businesses will be unable to recover any of the VAT.
A finance lease typically has a primary period for a fixed period at full cost, followed by a secondary period, usually of an indefinite length, at a very low cost.
The asset is treated as if it had been purchased. It is therefore capitalised in the balance sheet and depreciation is provided on an annual basis.
The obligation to pay future rentals is recorded as a liability in the balance sheet.
The rents payable are apportioned between a finance charge and a reduction of the outstanding liability.
The total finance charge should be allocated to accounting periods during the primary lease term and is khown as an expense in the profit and loss account.