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HMRC internal manual

Business Income Manual

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Specific deductions: hire purchase: accountancy treatment

The guidance in this section refers to section 20 of FRS102. Other accounting standards dealing with leases are SSAP21 and IAS17 neither of which is substantially different to section 20 of FRS102. If you have concerns regarding the accounting treatment of a hire purchase contract, seek advice from an HMRC compliance accountant.

Section 20 of FRS102 does not separately define a hire purchase contract. Such contracts are classified as either a finance lease or an operating lease according to their nature.

Most hire purchase contracts are of a financing nature. Generally, the option to purchase the asset is exercisable at below market value - often at a nominal amount - such that the hirer can be expected from the outset to take up the option. Under section 20 of FRS102 such hire purchase contracts should be accounted for as a finance lease, see BLM00215 onwards. In commercial reality such a contract is one of sale and purchase of goods, the agreement is a means of financing the transaction, and the ‘hire’ (revenue expenditure) element of the payments is equivalent to ‘interest’ on the finance provided.

Less commonly, there are hire purchase contracts which are not of a financing nature. For example, the option to purchase may be exercisable at a relatively high price such that the hirer may not take it up. Under section 20 of FRS102 such hire purchase contracts should be accounted for as an operating lease, see BLM00205.

For hire purchase contracts that are of a financing nature the accountancy treatment spreads the ’hire’ or ’interest’ element of the payments over the term of the agreement. The method used in accounts prepared in accordance with GAAP should be followed for tax purposes.