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.

As a result of the Financial Crisis of 2008, Companies should now be more transparent about potential third party liabilities. As such leases were always ‘off’ the balance sheet.

The Accounting Standard Authorities (ICAEW) are looking for more accuracy and are looking for Accountants and in turn, their clients to more accurately challenge whether a lease contract is an Operating Lease (off the balance sheet) or a Finance Lease (on the Balance sheet).

Each then has tax implications for Capital Allowances and Annual Investment Allowance.

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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 info@hardsoft.co.uk.

The Accountants View

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 practice Giess Wallis Crisp LLP.

With over 40 years of 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.

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"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 the lessee at the end of the 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.”

How much money can a business save in tax by computer leasing?

“The reality is you don’t save any tax, but what you do get to do, however, which is equally important, is to defer and spread the tax.

You get tax relief whether you buy computers outright, buy them on hire purchase or buy them through a lease, but it’s when the tax relief is given that makes the difference. With computer leasing, tax relief is given evenly throughout the life of the lease. On the other hand, with an outright purchase, you get all the tax relief upfront but then none in the following years.

Leasing provides an even spread of tax relief as opposed to peaks and troughs, which small and medium-sized businesses don’t always cope with well. It’s much easier to allow for an even spread of anything, so that’s what I like about the leasing tax relief approach.”

Is computer leasing easier to set up than most people believe?

“Oh, absolutely. Hardsoft makes it very easy to lease computers and it has the added advantage that your technology is up to date. These days, the amount of hacking that goes on means that if you don’t have up to date hardware and software, you are vulnerable. Computer leasing generates a more regular updating process for equipment at a spread-out cost as opposed to when businesses buy them outright. The way Hardsoft enable businesses to lease computers, you avoid the obsolescence of old kit a lot more easily.”

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.

Further reading & downloadable content from HMRC and the ICAEW

ICAEW standards- https://www.icaew.com/technical/financial-reporting/financial-reporting-helpsheets/accounting-for-leases-under-frs-102 Guidance from HMRC on the tax implications of leasing can be found at https://www.gov.uk/hmrc-internal-manuals/business-leasing-manual