A PCP would normally be regarded either as a finance lease or an operating lease for accounting purposes, depending on the accounting standards concerned, with the tax treatment following the accounting treatment, rather than giving rise to capital allowances. By contrast, a Hire Purchase agreement, meeting the requirements of s.67 CAA 2001, would qualify for capital allowances; importantly for a new/unused electric vehicle this brings the purchase within the availability of 100% first year allowances. There is therefore a clear tax preference for qualifying hire purchase over PCP or other finance arrangements.
A finance lease may still meet the conditions of s.67 for tax purposes, despite being labelled otherwise, and therefore qualify for capital allowances. Of importance in this respect is whether there is an optional “balloon payment” payable at the end of the main hire period to take outright ownership, and if so, the amount relative to the vehicle’s value. Hire Purchase contracts typically either pass ownership automatically after the main hire period or require payment of only a small amount relative to the vehicle’s value at that time. HMRC regard a finance lease with an optional balloon payment below the vehicle’s expected future market value at that time as being capable of meeting the requirements of s67 CAA 2001, see BLM39010.
PCPs generally involve payments during the primary hire period geared to the vehicle’s expected depreciation over that period and on this basis would not meet the “below market value” requirement; the tax treatment would instead follow the accounting treatment which would be to recognise a fixed asset and claim depreciation/finance charges through the profit and loss as HMRC describe in BLM13010:
“The finance lessee does not own the asset but shows it in its balance sheet as if it did (which is the economic substance if not, technically, the legal position). The finance lessee also shows the capital owed to the finance lessor as a debt.
In its profit and loss account the finance lessee
- charges the ‘interest’ element in the rentals in the same way as any other loan interest
- does not charge the capital element in the rentals: they are treated as loan repayments which go to reduce the debt to the finance lessor included in the balance sheet
- but instead charges depreciation on the asset”.
A qualifying Hire Purchase contract is treated for tax purposes closer to an outright purchase of the asset, giving the availability of capital allowances; on a new or unused zero C02 emissions car this would include 100% first year allowances (s45D CAA 2001).
By contrast, for tax and accounting purposes, Finance Lease, or operating lease rules are likely to apply, rather than capital allowances, to a PCP, unless the amount of any balloon payment required to exercise the option to buy the vehicle outright at the end of the main hire period is clearly below the expected market value at that time, and the conditions of s67 CAA 2001 are otherwise met.
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