Written by Ray Coman
The tax treatment of a lease will depend on the type of lease.
Capital allowances are available where equipment is purchased on:
- A finance deal. This is essentially a loan. The cost of the agreement in excess of the value of the item is typically a form of interest. Interest can be deducted from profit as the cost is incurred;
- Hire purchase. Again financing costs are tax deductible when incurred.
- A long funding finance lease. A finance lease occurs where the present value of the minimum lease payment (including any initial payment) amounts to 80% or more of its market value. A minimum lease payment, as the name suggest is the lease amount that a lessee is bound by the contract to pay. A lease is long funding with a term of more than 5 years.
Where the agreement is an operating lease (i.e. not a finance lease) and not long funding, rental costs rather than capital allowances are deducted from profits.
Provided title of the asset passes, VAT can be reclaimed on the cost of an assets acquired via hire purchase. In all other situations, VAT on rental payments are reclaimable.