Asset Finance is an important financing tool that drives the growth of businesses across the UK. But what is the tax treatment of Asset Finance like?
Your Guide to the Tax Treatment of Various Asset Finance Solutions
Asset Finance is one of the most popular commercial financing tools in the UK. Many businesses, for numerous reasons, cannot afford to purchase useful assets. They can, however, still make use of such assets to further the growth of their business with the help of various Asset Finance Solutions .
Four major types of Asset Finance exist:
Each type brings their own merits to the mix. Please visit this page to take a quick look at how these types of Asset Finance compare against each other. On this page, we have tried to summarise how the taxation and accounting treatment of Asset Finance works.
Hire Purchase Tax Treatment
Hire Purchase is a type of Asset Finance in which businesses use external financing to purchase an asset. Typically, such purchases are divided into monthly instalments. The borrowing business gains equity in the asset with each repayment. At the end of the loan term, the borrower claims the ownership of the asset and gains the title to the same. Since this is essentially a commercial purchase, the asset needs to appear on the balance sheet of the borrower.
The business can, hence, claim annual capital allowances against the cost of the purchase. Similarly, the interest paid to the Lender is usually tax deductible.
Finance Lease
Finance Lease allows the borrowing business to lease an asset from the lessor. The ownership of the leased asset remains with the lessor. However, since Finance Lease contract usually run over the course of years, the asset needs to appear on the balance sheet of the lessor as well as the lessee. Only the lessor, however, can claim capital allowances. The lessee can deduct the rentals from taxable profits. To make the Finance Lease more attractive to the lessee, many lessors agree to pass a share of the capital allowances to effectively bring the rental amount down.
Operating Lease
The tax treatment of Operating Lease contracts is just the same as that of Finance Lease. Since Operating Lease agreements conclude in a short period of time, the lessee can keep the asset off-balance sheet.
Contract Hire
Contract Hire allows the lessee to keep the rented asset (typically a vehicle) off-balance sheet. The lessee can also reclaim the VAT paid on rentals in its entirety, provided that the asset is used solely for the business purposes.
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Disclaimer: The information on this page reflects our best understanding of the prevalent taxation laws and accounting practices. No content on this page constitutes qualified legal, accounting or taxation advice. Please seek advice from your accountant for most recent advice & best practice.