Apologies as I have done this subject before but it is giving me a headache!
I have a sole trader client who has vehicles on a personal contract purchase scheme.
I took this client over and the previous accountant had (I believe wrongly) claimed capital allowances on the vehicle and then mileage allowance so I continued by not putting through any loan payments as an expense until the vehicle was changed. This vehicle was handed back and the purchase price from the garage cleared the finance.
A new vehicle has now been taken on a new pcp scheme. I believe I am correct in saying that the whole payments (less private use) can be claimed as an expense but obviously not capital allowances.
My question is can the deposit (which is a hefty 12k) also be claimed direct as an expense on the P & L, along with maintenance, fuel etc.
It just feels somehow wrong !!
Thanks in anticipation
Valerie
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Why 'obviously not capital allowances' ? Are you certain that this is not a purchase agreement?
Or if it is a lease agreement, is it a Finance Lease or an Operating Lease?
In my opinion you need to find out exactly which type of agreement your client has in place and then you can apply the correct treatment to the payments.
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Doug
These are only my opinions of how I see things and therefore should not be taken as advice
Just to update since anyone else finds they have this situation. I have just spoken to HMRC who have been very helpful.
The PCP scheme is not a purchase agreement as the vehicle is not owned unless the final balloon payment is made at the end.
Therefore, there are no capital allowances initially, the deposit can be claimed as an expense and the monthly payments in full (if co2 emissions less than 130) or with 15% deduction (if co2 emissions exceed 130)
If the final payment is made then this element becomes a capital allowance
One happy customer
-- Edited by lots to learn on Thursday 15th of November 2018 10:21:11 AM
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Responses are not meant as a substitute for professional advice. Answers are intended as outline only the advice of a qualified professional with access to all relevant information should be sought before acting on any response given.
Glad you got it sorted, so by what HMRC have said it seems that a PCP is treated the same as an Operating Lease so your client is basically just renting the vehicle.
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Doug
These are only my opinions of how I see things and therefore should not be taken as advice
Renting the vehicle unless the final balloon payment paid (which they never do).
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Responses are not meant as a substitute for professional advice. Answers are intended as outline only the advice of a qualified professional with access to all relevant information should be sought before acting on any response given.
I have read this but without knowing the final price to be paid after the hire period it is impossible to say if it is indeed correct, also this is only for guidance and does not refer to any legislation.
Maybe Valerie could let us know what the final price is on the agreement and whether HMRC referred to any legislation when offering her the advice?
Gotta go to work now but will comment further on this later when I have more time
-- Edited by Artois on Friday 16th of November 2018 06:45:59 AM
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Doug
These are only my opinions of how I see things and therefore should not be taken as advice
I'd say that whoever you spoke to at HMRC hasn't grasped the definition of the type of agreement your client has. The key word is 'purchase'. You will have a purchase price and total amount payable on the finance documents taking into account any document fees & interest etc. There will also be no breakdown of VAT within the monthly payments.
Operating Lease & Finance Lease will not show a purchase price, just the monthly 'rentals' + VAT. How each is treated is another subject.
There's more to this, but hope that gives you a steer.
I'd say that whoever you spoke to at HMRC hasn't grasped the definition of the type of agreement your client has. The key word is 'purchase'. You will have a purchase price and total amount payable on the finance documents taking into account any document fees & interest etc. There will also be no breakdown of VAT within the monthly payments.
Operating Lease & Finance Lease will not show a purchase price, just the monthly 'rentals' + VAT. How each is treated is another subject.
There's more to this, but hope that gives you a steer.
I agree, which is why I said in my first reply that the exact type of agreement needs to be known first before deciding on how to account for it, this is why I said that I was not sure if I agreed with what HMRC had advised as I cant see how anyone could make a decision without actually reading through the agreement to determine what type it was, but the word 'purchase' is key as you say.
HMRC told Valerie that a PCP is not a purchase agreement as the vehicle is not owned unless the final balloon payment is made at the end however legislation seems to say different
CAA2001 s67 clearly states that P&M is treated as owned by person entitled to benefit of contract etc if
a) a person carrying on a qualifying activity incurs capital expenditure on the provision of P&M for the purpose of the qualifying activity
b) the expenditure is incurred under a contract providing that the person shall or may become the owner of the P&M on the performance of the contract.
Which leads me to believe that CA may well be claimed if s67 is met but I would certainly not be advising anything unless I had actually read the whole agreement first and had a definitive decision as to what type of contract it is.
Just to play Devil's advocate here, if it is indeed an Operating Lease as HMRC say should the whole of the 12k deposit be claimed in the first year, an operating lease is the same as a rental so usually when you put a deposit down when renting something you will expect to get the deposit back at the end of the rental period I am assuming that here this will not be the case and that the deposit is actually a contribution to the rent and if this is so should it not then be apportioned over the length of the contract.
Just my views and there is a good chance I am wrong about all of the above but would be interested to see how others view the treatment of agreement and also the deposit.
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Doug
These are only my opinions of how I see things and therefore should not be taken as advice
Totally agree that this needs a re-visit with the benefit of full documentation review, plus it would be good to have Doug's question answered. £12k desposit! Wow, For what value car? term of lease, balloon £ (even if not taken up!)
Substance over form and all that.
Not sure if Valerie is likely to come back on soon and see this post and the later comments.
Other place to look, whilst acknowedging this is a sole trader, is IAS 17 as it gives some clear guidance as to when is a lease a finance lease (and when its not, its an operating lease). Risk and reward and all that. (Note, IFRS 16 comes into play next year when its a game changer for operating leases, for anyone pondering this thread for limiteds).
Oh and never ever ever ever take advice from HMRC about accounting processes. Plus remember tax follows accounting not the other way round.
Plus never ever ever take tax advice from HMRC neither! Said it before a million times - the guidance they give is just that - guidance. Often doesnt reflect the actual law. Especially at the minimum wage front end call handling staff level.
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Joanne
Winner of Bookkeeper of the Year 2015, 2016 & 2017
Thoughts are my own/not to be regarded as official advice,which should be sought from a suitably qualified Accountant.
You should check out answers with reference to the legal position
Just seen these comments and not sure what to think now!!
I was confident that this was indeed an operating lease as there is no final purchase price defined. This is decided at the point of purchase within the contract agreement or indeed at the end based on condition of the vehicle/ mileage etc. The lady's last car was settled by the garage by a used car purchase conveniently for the amount left owing on the finance.
The contract only states the car value at new, deposit paid, rental payments and interest, no VAT amounts (which didn't concern me as client not VAT registered)
There is an option to purchase fee of £10, not sure how relevant this is.
Aaargh
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Responses are not meant as a substitute for professional advice. Answers are intended as outline only the advice of a qualified professional with access to all relevant information should be sought before acting on any response given.
Hi Valerie
Just about to go out so can catch up with this later.
But for now:-
Deposit - known £12k
What is value of car being purchased (Parker's guide will do)
What are the lease payments £
What is the minimum term of the lease (4 years?)
What is the interest - implicit rate or may need to manually work out from Fair Value less lease payments.
What will be the amount o/s at the end - does the contract state that (similar to a balloon)
When you say the last car was settled - did she get the option of selling (as an agent/on behalf of the lessor) and paying the difference?
Lessee has option to acquier asset at value lower than FV?
Lease term - major part of economic life. I know cars last much longer than 4 years but have to consider drop in value in this I guess
Lease transferrring risks and rewards? what is the deal re car tax? MOT? Servicing? Im guessing its all on her.
Just a few things to consider.
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Joanne
Winner of Bookkeeper of the Year 2015, 2016 & 2017
Thoughts are my own/not to be regarded as official advice,which should be sought from a suitably qualified Accountant.
You should check out answers with reference to the legal position
I no longer have the actual contract plan as this has been returned to client and stupidly I've only kept the finance documents. It was titled Personal Contract Purchase Scheme.
From what I have
Deposit was 11,951
Car Cost 30,451
Finance 18,500
Interest 2,735 at 3.1%
Payments 253.53 for term of 37 months
No optional final payment figure
Looking at the paperwork now the previous car was settled with a Used Vehicle Purchase Invoice from the garage, I would assume client was given option to purchase but as this was before the end of the finance term she was clearly wishing to change anyway. The use of the Used Vehicle purchase Invoice does suggest that the client was indeed the owner of the vehicle.
I have completed the accounts and submitted the tax return for this. I did speak to 2 separate supposedly technical advisors at HMRC who both gave me the same information. I have documented this so do you think in the case of an enquiry that would be acceptable?
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Responses are not meant as a substitute for professional advice. Answers are intended as outline only the advice of a qualified professional with access to all relevant information should be sought before acting on any response given.
Hi Valerie
Im presuming that she has the usual PCP options at the end of the lease period:- she can make a balloon payment and keep the car (might be called something else as they like to change terminology!) or she can give the car back and they sell the car to try to gain sufficient to cover the balloon.
With the paperwork for the previous car, was this done as a separate transaction or is it indeed being used in part ex of the new one (and essentially forms part of the deposit for this one)? Just out of interest.
Im of the opinion that this is a finance lease as it transfer substantially all the risks and reqards incident to ownership. But I have to caveat it with not seeing the document and its just my opinion.
Doug - what do you reckon with little bit of added info.
Dare I ask Shaun - I know you're busy bud but use of a chartered head would be a boon.
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Joanne
Winner of Bookkeeper of the Year 2015, 2016 & 2017
Thoughts are my own/not to be regarded as official advice,which should be sought from a suitably qualified Accountant.
You should check out answers with reference to the legal position
I swayed away from it being a finance lease because of the 'option to purchase' in the agreement, I was under the impression that with a finance lease you did not have this option and at the end of the agreement the vehicle was either sold to a third party or they could have a 2nd hire period.
I still believe after a bit more research that a PCP is basically a conditional sales agreement and that CA should be claimed for the full cost and included on the balance sheet, although it has been interesting to see from all the articles and comments that I have read that there are differing views with some saying it should be treated as revenue and others saying it should be capitalised.
Would be handy to know the VAT treatment on the payments because as Mike said this would give some indication as to what the actual agreement is.
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Doug
These are only my opinions of how I see things and therefore should not be taken as advice
I swayed away from it being a finance lease because of the 'option to purchase' in the agreement, I was under the impression that with a finance lease you did not have this option and at the end of the agreement the vehicle was either sold to a third party or they could have a 2nd hire period.
I still believe after a bit more research that a PCP is basically a conditional sales agreement and that CA should be claimed for the full cost and included on the balance sheet, although it has been interesting to see from all the articles and comments that I have read that there are differing views with some saying it should be treated as revenue and others saying it should be capitalised.
Would be handy to know the VAT treatment on the payments because as Mike said this would give some indication as to what the actual agreement is.
I'd agree this is looking like a purchase and CA should be claimed. The £10 option to purchase fee is a big giveaway. Whether a HP or PCP with a balloon/guaranteed future value/whatever you want to call it, I would capitalise it. Terminology can be very loose Valerie so I would get my hands on all the docs again if possible. If a PCP there will definitely be a GFV = return the car with nothing more to pay bar damage/excess mileage and finance will be settled off or you sell/part-exchange and if you get more than the GFV that's your equity.
Finance Lease has to be sold to a third party and there's usually a % of the sales price returned to the lessee - normally 95% to 98% with the finance company keeping the rest. The 'rentals' will also have a VAT breakdown. The finance docs will also quite clearly state 'Finance Lease'. Operating Lease is commonly called 'Contract Hire' on docs.
As expected client is a nightmare to get hold of info from but I will start the tiresome process and see if I can make any more sense of it. One of those situations that feels utterly draining.
Have a good day everyone
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Responses are not meant as a substitute for professional advice. Answers are intended as outline only the advice of a qualified professional with access to all relevant information should be sought before acting on any response given.
