How leases are classified has important implications, for example, for reported levels of indebtedness, gearing ratios, return on assets employed and interest cover and therefore the choice of lease.
Contract Hire (technically referred to as an Operating Lease) is probably the most popular method of acquiring fleet vehicles.The key elements of contract hire are:
• The asset (the motorcycle in this case) is for the use of the customer rather than being owned
• Fixed interest rate for duration of the lease
• No residual value risk
• Capital is retained in the business for essential use as existing credit lines are usually not affected
It is popular due to its key benefits:
• The lessee (the user) is guaranteed to be removed from losses as a result of market fluctuation in used prices
• As the rentals are allowable against corporation tax in the current year, tax benefit is accelerated, rather than waiting until the asset is disposed of as is the case where the asset is owned
• VAT efficient, the rental is calculated on the net purchase priceLessee benefits from purchasing power of the lessor
Operating leases are treated as revenue, not capital expenditure and do not appear on the lessees’ balance sheets. The guidance varies from sector to sector but essentially all seek to measure if the “risks and rewards of ownership” pass to the lessee. Operating leases offer a cost effective alternative should the lessor be able to offer better asset management and resale skills than the lessee could provide. |
