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Help Please. Accounting for Vehicle Lease and Improvements to Rented Property

  • 120 posts
  • # 101128

Hi All

I wonder if anyone could help me please.  I am setting up accounts (Sage) for a new client who has just started a new business.  My questions are:

He has leased a van – definitely an “operating lease” with no option to buy at the end of the period.  He paid a deposit and then monthly lease payments.  Should I just post the actual payments to the 7000’s?  Can he still claim other expenses for operating the vehicle i.e. 45p per mile or actual spend?  Anything else I need to be aware of?  Does this have no effect on the balance sheet at all?

Similarly, he is paying rent on a business property.  Again, no option to buy at the end.  He has incurred expenditure on this property by means of “Improvements to property” (not maintenance).  My understanding is that “improvements” is usually capital expenditure.  But as he is only renting, will this just be overhead/expense?  Any pitfalls here to be aware of?

Thank you very much for your help.

Best Wishes Everyone

Hel

  • 51 posts
  • # 101148

Hi Hel,

You haven't said whether your client is incorporated or self employed.  The rules are slightly different depending on this.  Either way, is it a proper van or can it be classed as a car?  The sales invoice should indicate the status of the vehicle, but if in doubt HMRC website has clear instructions about what constitutes a van.  Without this info, it is difficult to give any guidance.

As far as the 2nd point in your post is concerned, why would your client renovate a property that he is renting?  All that does is improve the value of the property for the landlord.  Your need to check whether the property is on a short/medium/long term lease or if it is merelt rente.  Again, different rules apply. 

Come back with the answers to these questions/points and I may be able to help further.

  • 120 posts
  • # 101150

Hi Roz

Thank you very much for your reply.  Sorry, I should have given more info.  The business is incorporated.  The vehicle is definitely a van.  I haven't examined the paperwork for the vehicle lease.  I've kind of been leaving it to the end as I'm not sure of the correct treatment.

Similarly, I'm not sure of the details of the property rental.  He had to build partition walls etc. to make it suitable for his purposes.  I will definitely examine the paperwork further and come back to you (after Monday now), if that's ok.

Thanks again.  I really appreciate your trying to help me and advising me to provide further info.

Have a great weekend.

Hel

  • 153 posts
  • # 101152

Mileage is an option for self employed people or employees using their own vehicle for business use. Is the van being leased by the company? If so, it's a company vehicle and so the lease and all actual payments made eg diesel and insurance are company expenses, not mileage. You will also need to consider whether there is a benefit in kind if he has personal use of the vehicle.

If he has leased the vehicle personally it is more tricky, you'd need to check with his accountant really as the full costs may still be able to go through the business, depending on exactly how the lease has been set up, or it may be that non ofit can and he can only claim mileage from the company. I'm assuming he is VAT registered, if so you need to be clear on this for the VAT implications.

For the property improvement, that is also a tricky area. The tax rules regarding what is and isn't allowable in this situation are quite complex so again I'd say the best thing is to have a chat with the accountant and found out how they would like it set up. Generally you need to identify which transactions are expenses and which are capital items (which isn't always easy with building works), then consider whether they are fixtrues and fittings or improvements to leasehold property. It may be that entering a description for each item is important here so that the accountant can work out the tax treatment of the different items at the end of the year.

  • 120 posts
  • # 101154

Hi Ruth

Thank you very much for your reply.  The client is VAT registered and he is hoping to reclaim the VAT on the expenditure for the building work.

Given everything you've said about the complexity of both the van and the building work, and the fact that both you and Roz have confirmed that I don't have enough information, I will now fully examine all the paperwork to get all the facts and then consult with the client's accountant.

Thank you both for making me aware of all the details that need to be considered.  It's very much appreciated.

Happy Weekend

Hel

  • 51 posts
  • # 101155

Hi Hel,

The van is an operating lease as you said.  If the lease is in the company's name, all the better.  If not, ideally it should be changed to the company name, as slightly different rules apply, but for now I'll assume it is a company expense.  Payments should be charged to P&L.  Maintenance, insurance and RFL are company expenses, so no problem there. Your client must be either a director or employee of the company so BIK comes into play but the BIK on vans is only about £500.  HMRC have the exact amount.  As far as fuel is concerned, if the mileage is to be claimed it has to be claimed at the company vehicle rate, currently approx 17p per mile depending on engine size, but as it is a van there is no tax to pay on private mileage if it is only commuting.  In other words the client would have to go straight home or to work - no detours for children or shopping allowed.  Whichever reimbusement system is adopted your client needs to keep mileage records. HMRC website has all the details you will need for this.

 The building improvements should be easy to sort.  From a bookkeeping point of view, they can be capitalised and written off over the life of the lease.  A shorter period can be used if you prefer.  Capital allowances may be an issue, but I don't think you will be involved with that element.  If I am wrong with that assumption and you need more help, let me know.

  • 120 posts
  • # 101159

Hi Roz

Thank you for this very detailed advice.  It’s starting to become clearer now and once I’ve combined all the advice given here with the facts from the client, I should be in a much better position to get it all sorted out.  I’m off to go peruse the HMRC site, and then back to my study materials to see why I’ve missed this.

Thanks again.  Don’t know what I’d have done without you both.

Very Best Wishes

Hel

  • 51 posts
  • # 101160

Hi Hel,

One thing I failed to mention in my earlier reply, because I hadn't realised that your client is VAT registered, is that whatever mileage rate is claimed, VAT can be reclaimed on the fuel element of the mileage rate.  This should always be the company vehicle advisory rate and you will need to have sufficient fuel receipts to cover the miles travelled, but if you choose to put the fuel receipts through the books you will not have to do this.

Any VAT charged on the building costs should be reclaimable because the work was done on the premises so would be relatively easy to verify if needs be.

I doubt that you would find any reference to either of your scenarios in your study material, unless you are talking about specialist tax studies, because neither instance is standard and you could go for years without having to consider either situation.  This is one for the Keep Learning, Keep Improving folder.

 

Good luck!

  • 120 posts
  • # 101161

Hi Roz

Thank you for the further info.  I've just finished trawling through HMRC.  What a way to spend a Saturday evening!!  Head is buzzing but at least I'm starting to "get it" and I can speak more knowledeably when I discuss with client.  I'm glad that some of it might be quite straighforward now that I understand it better.

Reassuring to know that I hadn't forgotten from my studies.  Hopefully, I've "learned and improved" a little.

Thanks so much for all the advice and guidance and encouragement. Smile

Hel



Edited at 24 Aug 2014 12:41 AM GMT

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