Finance Lease
A
Finance Lease is a leasing arrangement that enables a VAT registered
customer to recover some of the VAT on a vehicle whilst retaining the
risks and rewards of ownership. The payment profiles are similar to
Contract Hire with a low deposit (Normally equivalent to three monthly
rentals) followed by a fixed monthly payment, over 24 to 48 months, with
a final balloon payment equivalent to, or less than, the estimated
future value of the vehicle. Once this final payment is made the lessee
can continue to use the vehicle at a nominal peppercorn rent, or sell
the vehicle on behalf of the lessor and retain the sale proceeds
(normally less 2% sales agency fee).
It
is important to stress that at no point does the lessee own the vehicle.
These arrangements are made to take advantage of the fact that Leasing
Companies are entitled to re-claim VAT on Vehicles and any normal VAT
registered business is not.
Key Benefits:
Low
Deposit
Fixed
monthly cost (although risk of loss or gain on disposal is
retained by lessee)
VAT
Saving
These
contracts tend to be used by larger organisations that wish to retain
the administration of their own fleets. Under a Finance Lease
arrangement the lessee is also carrying the depreciation risk and is
responsible for disposing of the vehicle on behalf of the lessor. These
arrangements are only suitable for lower value vehicles (See Taxation
and ‘Finance Lease’ below)
Taxation and Finance
Lease:
VAT:
VAT is
chargeable on Finance Lease rentals at 17.5% and is reclaimable by the
lessee subject to a 50% restriction where there is a private usage
element in the vehicle.
VAT on the
maintenance elements of any Finance Lease arrangement is fully
reclaimable.
Corporation
Tax/Income Tax:
Although
Standard Accounting practice dictates that assets under Finance Lease
arrangements are shown on a Company’s Balance Sheet it is the Leasing
Company that claims the Capital Allowances. It is the monthly lease
payments that are allowable against taxable profits.
The percentage
of the Finance Lease payment that is allowable against tax is calculated
as follows:
12,000 + (Cost of vehicle –12,000)
--------------------------------
2
Example:
For
a vehicle with a capital cost of £20,000 the percentage of the funding
element of the contract hire payment that is allowable is:
12,000
+
(20,000 – 12,000)
---------------------------
= 80 %
2
Please note
that this formula is always applied in a Limited Company situation but
for Sole Traders and Partnerships the split may be based on the actual
percentage of private use in the vehicle as agreed on an individual
basis with the Inland Revenue.
The
maintenance element of the contract is wholly allowable against
taxation.
The significance of this restriction in the amount of the Finance Lease
Rental that is allowable against tax is that it becomes less tax
efficient to Lease vehicles of higher value. Eventually the loss of
corporation/income tax relief outweighs the inherent VAT saving of a
Finance Lease.
It is more tax
efficient and therefore more cost effective to Purchase higher value
vehicles than it is to Lease them (See Contract Purchase). Using the
Deloitte and Touche ‘Fleet Choice’ tax planning software the breakeven
point occurs at £20,000 for Companies paying Corporation tax at the
normal rate and £26,000 for Companies paying Corporation tax at the
small companies rate.
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