The Accounting Treatment of Leasing Computers
Accounting standards are constantly changing and the way a lease agreement is calculated into your Accounts seems to regularly change as well. Accountants in the last few years have seen tighter guidelines on how the value of any equipment on a lease contract should be shown in your annual accounts.
HMRC agrees that ALL Leasing payments are 100% allowable against Tax.
ADDITIONALLY, Under an Operating lease, you can claim full tax relief for the monthly rentals. Under a Finance Lease, you can claim full tax relief for the annual depreciation of the capitalized asset and finance charges. Annual Investment Allowance is also a factor to be considered. This has a current maximum of £500000 annually.
HardSoft is always happy to help. We can provide info to assist your Accountant.
Firstly, your Accountant may well ask for a copy of the Lease contract. We are happy to provide a copy of this. BUT this agreement as it stands will not be enough for him or her to make any decisions about tax treatment. They will need to understand that we offer unique lease solutions. If you are unsure which of these your contract is under we can provide that information to your accountant. Get in contact with your account manager or email email@example.com.
At the expiry of the lease period, the equipment is collected by us. There is no right of ownership and generally, this is an Operating Lease
When the lease finishes there is a notional fee to pay of £1 to transfer ownership to yourselves. Depending on the package and equipment this could be either a Finance -Lease or an Operating Lease.
This is a pure subscription model with no options to own the equipment at any point and we deem as an Operating Lease
More Details on Financial Reporting Standards & Leasing for Businesses.
Small and medium-sized business preparing their financial statements under Financial Reporting Standard 102 are required to treat lease contracts as either Operating Leases or Finance Leases. From 1st January 2019, large companies preparing their financial statements under International Financial Reporting Standard 16 are required to account for lease contracts as Finance leases unless they are under 12 months or are of low value.
In order to shed light on what can be a potentially confusing area, HardSoft has spoken with Tony Crisp, a Chartered Accountant at Harlow-based accountancy practise Giess Wallis Crisp LLP.
With over 40 years’ experience advising businesses both large and small, GWC covers the full range of general practitioner services including accounts, audits, taxation, bookkeeping, and payroll for corporate clients and the self-employed… Learn more
The Financial Reporting Standards say that in deciding whether a lease is an operating lease or a finance lease you should consider the substance of the agreement, not necessarily it’s legal form – in other words, look at who effectively bears the risks and rewards of ownership.
When, substantially, all the risks and rewards incidental to ownership of the equipment are held by the lessee it should be accounted for as a Finance Lease. The Financial Reporting Standard provides the following examples of situations that individually or in combination may lead to a lease being classified as a Finance Lease.
- Ownership of the equipment is transferred to lessee at the end of term automatically
- There is option/right to purchase for a low value (lower than the fair value) at end of term
- The lease term covers most of the economic life of the equipment even if title is not transferred
- At the beginning the present value of the minimum lease payments amounts to at least substantially all the fair value of the equipment.
- Is the equipment so specialised that it can only be used by the lessee?
- If cancellation is allowed the losses are borne by the lessee
- Gains or losses from fluctuation in the residual value of the equipment accrue to the lessee
- Lessee can continue the lease for a pepper corn rent in the secondary rental period
Why leasing is better than buying?
Tony Crisp is a Chartered Accountant at GWC. His Advice is on this issue is that it is best suited for… “Start-ups and small business and Fast growing 20+ people businesses… for the following reasons…
- No large up-front deposits
- Spread payments to smooth out cash outflows
- Easier to upgrade equipment. Particularly important with IT
- The full monthly rental is tax deductible
- Can get more flexible terms.
- Not buying an uncertain residual value
- Won’t be left with outdated equipment at the end
And Larger PLC / Or Groups
- All of the above plus more tax relief if AIA’s already used up in the Financial Year elsewhere in the Group of Companies.”
Further Reading & Downloadable Content
Guidance from HMRC on the tax implications of leasing can be found at https://www.gov.uk/hmrc-internal-manuals/business-leasing-manual
HardSoft Ltd is not a tax advisor and as such, you should always seek professional advice. We are happy to assist your Accountant and are happy to provide any assistance with clarifications on our Leasing solutions.