Newly Self Employed - Buying a Van
Discussion
Eric Mc said:
Therre IS a difference but it can be open to interpretation.
Many Finance Leases will contain a clause which indicates that there is an option at the end of the Primary Lease Period to either retain the asset and continue to lease it in what is called the Secondary Lease Period. Another option is that the leassee can actually buy the asset for a one-off payment AFTER the Primary Lease Period has ended. That one-off additional payment can be a large "balloon" payment or as little as £1. The important thing is that legal title to the asset passes on that payment.
Operational Leases/Rentals do not have this set of options.
At the end of the day, the individual responsible for accounting for the asset and the related lease needs to scrutinise the technical aspects of the lease and make up their mind as to what type of lease they are looking at. In my experience, the LAST person to consult is the person you are dealing with at the van/car showroom as they are only interested in striking the deal with you and maximising their commission.
Sorry this is what mislead me.Many Finance Leases will contain a clause which indicates that there is an option at the end of the Primary Lease Period to either retain the asset and continue to lease it in what is called the Secondary Lease Period. Another option is that the leassee can actually buy the asset for a one-off payment AFTER the Primary Lease Period has ended. That one-off additional payment can be a large "balloon" payment or as little as £1. The important thing is that legal title to the asset passes on that payment.
Operational Leases/Rentals do not have this set of options.
At the end of the day, the individual responsible for accounting for the asset and the related lease needs to scrutinise the technical aspects of the lease and make up their mind as to what type of lease they are looking at. In my experience, the LAST person to consult is the person you are dealing with at the van/car showroom as they are only interested in striking the deal with you and maximising their commission.
Eric Mc said:
No - that's not what I said.
What I was saying is that SOMETIMES there is an option that allows the lessee to buy the asset from the lessor for an agreed sum. This transaction is nothing to do with the original lease in that the old lease has now finished and the lessor is free to do what he likes with the asset, after all, he still owns it - including selling it to the former lessee if both parties are in agreement.
and again. As far as I'm aware the lessee can not buy the vehicle.What I was saying is that SOMETIMES there is an option that allows the lessee to buy the asset from the lessor for an agreed sum. This transaction is nothing to do with the original lease in that the old lease has now finished and the lessor is free to do what he likes with the asset, after all, he still owns it - including selling it to the former lessee if both parties are in agreement.
Anders0n said:
So if there is no option to buy the van in the contract at the end of the finance lease, this can be seen as an operational lease?
The same would apply to contract hire then?
I sorted myself out an accountant earlier and he basically said the same thing, no option to purchase = effectively renting = claim 100% of the payments.
No it is a finance lease due to the lessee taking the risk on the residual value of the vehicle. The lessor takes the risk on a contract hire agreement which is an operating lease.The same would apply to contract hire then?
I sorted myself out an accountant earlier and he basically said the same thing, no option to purchase = effectively renting = claim 100% of the payments.
CaptainSlow said:
Eric Mc said:
No - that's not what I said.
What I was saying is that SOMETIMES there is an option that allows the lessee to buy the asset from the lessor for an agreed sum. This transaction is nothing to do with the original lease in that the old lease has now finished and the lessor is free to do what he likes with the asset, after all, he still owns it - including selling it to the former lessee if both parties are in agreement.
and again. As far as I'm aware the lessee can not buy the vehicle.What I was saying is that SOMETIMES there is an option that allows the lessee to buy the asset from the lessor for an agreed sum. This transaction is nothing to do with the original lease in that the old lease has now finished and the lessor is free to do what he likes with the asset, after all, he still owns it - including selling it to the former lessee if both parties are in agreement.
Why can't the lessor sell the asset when the lease has reached the end? It's their asset - they can sell it to whoever they like.
CaptainSlow said:
Not 100% sure to be honest. I think it is due to the VAT treatment of the rentals.
eta
the not being able to buy the car allows the VAT treatment to differ from purchase leases, HP, Lease Purchase and Contract Purchase.
Correct, rental type leases tend to have a VAT charge on each monthly payment.eta
the not being able to buy the car allows the VAT treatment to differ from purchase leases, HP, Lease Purchase and Contract Purchase.
Edited by CaptainSlow on Monday 26th July 22:29
Finance Leases don't.
Once a lease is finished, the slate is wiped clean and the lessor can do what they like with the asset.
Edited by Eric Mc on Tuesday 27th July 09:02
OK what you're describing are products that fit under the accounting definition of finance leases. These primarily being Hire/Lease Purchase and Contract Purchase products. With these products the ownership can transfer to the lessee ath the end of primary period.
There is also a product called Finance Lease (also sits under the finance lease accounting defintion). The VAT position on this is the same as Contract Hire ie base rental is calculated with net figures and then VAT added on top. If VAT registered the lessee can reclaim 50% of the VAT on the finance element. The difference to contract hire being the lessee has to pay the set balloon figure hence take the residual value risk. Due to the VAT treatment the ownership can't transfer to the lessee.
There is also a product called Finance Lease (also sits under the finance lease accounting defintion). The VAT position on this is the same as Contract Hire ie base rental is calculated with net figures and then VAT added on top. If VAT registered the lessee can reclaim 50% of the VAT on the finance element. The difference to contract hire being the lessee has to pay the set balloon figure hence take the residual value risk. Due to the VAT treatment the ownership can't transfer to the lessee.
Edited by CaptainSlow on Tuesday 27th July 15:54
Interesting comment from an article on where accountants get things wrong (it's from Accountancy Web)
Leasing
A dispute which has become commonplace among practitioners who ask me questions after lectures concerns regulators who challenge practitioners’ and auditors’ treatments of leases within the financial statements. Leases that meet the definition of ‘finance’ leases in SSAP 21 (IAS 17) must be capitalised and a corresponding liability recognised in the balance sheet (statement of financial position). Operating leases that meet the definitions of such are charged to the profit and loss account (income statement) on a straight-line basis over the life of the lease, unless another systematic method is more appropriate. Be sure to check whether ‘risks and rewards’ of ownership have passed to the lessee (indicative of a finance lease) or remain with the lessor (indicative of an operating lease). Such indicators are considered in SSAP 21 (IAS 17).
Leasing
A dispute which has become commonplace among practitioners who ask me questions after lectures concerns regulators who challenge practitioners’ and auditors’ treatments of leases within the financial statements. Leases that meet the definition of ‘finance’ leases in SSAP 21 (IAS 17) must be capitalised and a corresponding liability recognised in the balance sheet (statement of financial position). Operating leases that meet the definitions of such are charged to the profit and loss account (income statement) on a straight-line basis over the life of the lease, unless another systematic method is more appropriate. Be sure to check whether ‘risks and rewards’ of ownership have passed to the lessee (indicative of a finance lease) or remain with the lessor (indicative of an operating lease). Such indicators are considered in SSAP 21 (IAS 17).
Peachy Kleen said:
Hi. if i use a loan to buy a van can i put total money payed out in repayments each year on tax return Example buy a transit custom £22000 deposit/ part ex £2000 payed loan back over 4 years at £5000 per year. instead of claiming full £22000 in first year?
If you have bought a van (irrespective as to whether you used a loan to buy it), you can claim the relevant Capital Allowances on that van.You can NEVER, EVER offset the capital element of loan repayments as tax deductible costs. You CAN make a claim for the interest element of any loan repayments.
The normal annual Capital Allowance claim on a van would be 18% per annum on the tax written down value. You can claim 100% Annual Investment allowance if you want to but the AIA can be claimed at any percentage up to 100% - it's not compulsory to claim it at 100%.
However, if you DON'T make the 100% claim, whatever written down value is left to carry forward to the next and future years will only be eligible for the normal Writing Down Allowance claims.
Have you prepared formal accounts for your business or are you just slotting numbers in boxes on the tax return?
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