Purchasing fixed assets like land, plant and machinery can be a huge financial commitment when planning your financial year.
Lease and Hire can be a solution to this whereby the financial obligation is spread over the life of the asset.
What does it mean “to Lease”?
In a lease, ownership lies with the lessor. The lessee (user) has the right to use the equipment however the user does not have the option to purchase. It involves a financial contract between the owner and user for using a particular asset over a period of time against the regular payments called “Lease rentals”.
Does leasing need to comply with any Accounting Standards?
AS-19 deals with the accounting policies applicable for all types of leases except certain types i.e. Lease agreements for use land, licensing agreements e.g. Motion picture films, video recordings, plays, manuscripts, patents and copyrights and lease agreements for exploring or using natural resource e.g. Oil, gas, timber, metals and other mineral rights.
Can I claim tax on leasing?
As ownership of the asset has not been acquired the VAT on the asset cannot be reclaimed. Instead the VAT on the rental charge by the finance company is reclaimable.
No capital allowances are available to the lessee but the rental payment is fully deductible in arriving at the taxable profits of a business.
What is Hire Purchase?
With hire purchase, the hirer has the option to purchase. The hirer gets possession of the asset as soon as the hire purchase agreement is signed. A deposit is usually required.
The instalments cover the principal amount and the interest cost towards the purchase of an asset for the period the asset is used. The hirer becomes the owner of the equipment immediately after the last instalment is paid. Up until that date the hirer is entitled to repossess the goods in the event of the customer failing to make the repayments.
Can I claim Tax on Hire Purchase?
The advantage of Hire Purchase is that you will be entitled to reclaim all the VAT at the start of the agreement.
Capital allowances are usually available at a rate of 12.5% per year on the machine. You will be subject to a balancing charge on disposal of the asset. An interest or finance charge will be included in the hire purchase agreement which may qualify as a business expense, however, it must be distributed over the term of the agreement and all of it may not be claimed up front.
For expert business advice please contact us at McEvoy Craig
