Leasing and Taxation Explained – an accountant’s explanation

9th September 2020
Tax and Leasing Explained

We asked an accountant to explain leasing and taxation for our customers

HMRC agrees that all leasing payments are 100% allowable against tax, but the guidelines on the way the value of any equipment held on a lease contract should appear on your annual accounts and accounting standards are continually updated. We can provide information on your lease to help your accountant if they need it, we also have some guidance from an accountant on leasing and taxation here.

What are the simple differences between a finance lease and an operating lease?

Where substantially all the risks and rewards incidental to ownership are transferred to the lessee, they should account for them as a finance lease. This means that equipment will appear as an asset and the liability to the lease payments as a loan on their balance sheet. Where substantially the risk and rewards remain with the lessor, or they should account for them as an operating lease, charging the rentals to the profit and loss account. I wouldn’t like to say that one is necessarily better than the other. They both receive full tax relief.

Why would a lease be good for a startup company?

The benefits of the lease for small companies, and companies going through rapid growth, are that they don’t have to pay any upfront deposits. And the payments are spread helping their cashflow.

What is the difference between capital allowances and AIA?

Capital, allowances, or allowances given to businesses for the purchase of capital equipment, such as computer equipment. They come in two forms annual writing down allowance and the annual investment allowance or AIA.

The current annual writing down allowance is 18% of the cost on a reducing balance basis. So it can take over eight years before a business will receive full tax relief on 80% of the cost of the equipment. The current rate of annual investment allowance is 100% of the cost in lieu of purchase, limited to 1 million pounds of capital expenditure.

Have these allowances changed recently?

The annual investment allowance limit was increased from £200,000 to 1 million pounds from the 1st of January, 2019. It could change again at the end of 2020.

Should these allowances affect a company’s decision to purchase or lease new equipment?

All businesses should give careful consideration as to whether they should purchase their equipment and claim capital allowances, or lease the equipment. What’s often overlooked is that the AIAs have to be shared amongst group companies. So not all the companies in the group may receive the allowance.

Are there new accountants standards for lease agreements and, if so, why?

Small companies have been required to prepare their financial statements under financial reporting standard 102 since 2015. This requires them to account for their lease contracts as either operating leases or finance leases. Large companies, such as PLCs have been subject to the same rules since the 1st of January, 2019. These changes were made to ensure that companies were showing their debts on their balance sheet.

Could the new accounting standards lead to confusion for businesses as well as accountants?

Well, there shouldn’t be too much confusion for accountants, but there could be confusion for businesses. Because there is no numerical test to decide if an agreement is an operating lease or a finance lease, it’s a judgment based on a number of indicators. So different people can come to different conclusions in different circumstances.

If you have any questions about leasing from HardSoft, give our expert team a call on 020 7111 1643 or email sales@hardsoft.co.uk.