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Finance Leases are leases that transfer to the customer (Lessee) substantially all
the risks and rewards of ownership associated with owning an asset. As with all
financial products a Finance Lease spreads the cost of any capital purchase
throughout a pre-determined lease period. Specific features are:
- The lessee does not have legal ownership of the asset
- The Lessor has legal title and tax title
(the lessor claims writing down allowances)
- At the end of the primary period of the lease the lessee may continue to use the equipment on the payment of a peppercorn rental.
- Alternatively the Lessee can return the equipment to the Lessor or sell the equipment to an independent third party.
- On receipt of the sale proceeds the Lessor will then rebate a percentage of this sum (Typically 97.5%) to the lessee as a rebate of rentals.
- Lease rentals are subject to VAT, but the VAT on the original cost is paid by the Lessor.
Accounting treatment
A Finance Lease is treated similarly to a Hire Purchase from the
balance sheet perspective and must be shown as an asset in the
books of the company.
N.B. Lease Purchase is NOT a lease
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