Posts Tagged ‘funsing’

Should I buy, lease or use HP to obtain that needed addition equipment?

Over the years I have often been asked what is the difference between buying, leasing or using HP to obtain that needed extra piece of equipment. The answer really is different from one company to the next, but here are the general guidelines concerning how they are treated for accounting, Tax and VAT purposes.

Outright Purchase:

From an accounting viewpoint the actual cost of the asset is capitalised in the balance sheet and an annual charge for depreciation is shown in the accounts as an expense in the profit and loss account. This therefore has the effect of showing the asset(s) in the balance sheet at cost, reduced by the cumulative charge for depreciation.

The annual depreciation charge is calculated in accordance with accounting standards, based on the useful economic life of the asset and the residual value.

image creator: Rob Wiltshire

The actual charge for depreciation is not allowed for tax purposes, as this is replaced by capital allowances, which is HM Revenue & Customs deduction regime for allowing capital expenditure against chargeable profits. The first £50,000 of expenditure each year on plant and equipment, excluding cars, qualifies for a 100% capital allowance deduction. Expenditure in excess of £50,000 enters either the 10% pool or the 20% pool, attracting a writing down allowance (WDA) at the appropriate rate.

A temporary first year allowance of 40% is available for expenditure on plant and machinery that exceeds the annual investment limit incurred in the year commencing on 1 April 2009 (corporation tax) or 6 April 2009 (income tax). This allowance applies to expenditure which would otherwise have been allocated to the main 20 % pool but excluding cars and assets for leasing.

Unless the asset is a car, the VAT shown on the supplier’s invoice will generally be recoverable by the purchaser.  VAT on cars is recoverable only in very rare circumstances.

Hire purchase

A HP agreement usually includes an option to purchase at the end of an initial period. Payment of this nominal fee transfers title of the asset and brings the legal agreement to an end.

The asset is treated as if it had been purchased. It is, therefore, capitalised in the balance sheet and depreciation is provided on an annual basis.

The obligation to pay future instalments is recorded as a liability in the balance sheet.