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The asset is capitalised in the balance sheet with an equal liability created.
The repayment is split between capital & interest (split created using your normal method for all other Hire Purchase or similar agreements) with the capital amount reducing the liability and the interest element going in the profit & loss account as a cost.
The combination of the above two items effectively allows you to claim 100% of the repayments against taxable income.
At the end of the year in the filed accounts a note is added under the fixed asset schedule itemising the value of the assets held under a finance lease and the depreciation applied to these assets.
The liability is split between current (due within one year) and long term (due in more than one year).
The asset is capitalised in the balance sheet with an equal liability created.
The repayment is split between capital & interest (split created using your normal method for all other Hire Purchase or similar agreements) with the capital amount reducing the liability and the interest element going in the profit & loss account as a cost.
Depreciation is applied to the asset using your normal depreciation rules for this type of asset.
When calculating your taxable income you will need to add back the above depreciation and effectively replace it with the Capital Allowance (This figure is the tax saving associated with owning the asset, the government allows each business to claim back against taxable profits an amount known as capital allowances, these capital allowances are calculated on a reducing balance and can vary due to the asset from 6% to 18%.
In some circumstances Businesses may also be able to claim an Annual Investment Allowance (AIA) for the first £1,000,000 or qualify for the Full Expensing capital allowance scheme allowing up to a 100% deduction against taxable profits; of purchases in any accounting year.
At the end of the year in the filed accounts the liability is split between current (due within one year) and long term (due in more than one year).
Each repayment goes into the profit & loss account as a cost.
Operating leases have a residual value built into them and do have to meet official accounting rules.
Please note that the above information is intended as a guide only. Your accountants/auditors will provide you with exact tax treatment based on your individual organisation.
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