Changes to accounting rules
BEFORE your eyes glaze over and you decide to go and make a cup of tea, let me just say now: don’t worry.
Although changes to the accounting rules for the way car leases are shown in balance sheets – possibly the end of contract hire as an off-balance sheet item – these changes will, in all probability, not affect any of your businesses.
However, before you think all’s OK, there are changes to the way cars are written down. And this will affect your business. So probably a good idea to pay some attention.
First let’s start with the good news. Currently, there are new accounting standards being proposed by the International Accounting Standards Board (IASB) that are intended to bring all leased assets onto the balance sheet. The idea is to give a more complete picture of a business’s financial position. There’s much discussion among the asset financiers about how this might affect leases. But it doesn’t affect small businesses. At all.
The proposals, should they be accepted, only affect publicly quoted publicly limited companies that use the IASB reporting standards. If introduced, they would ensure publically quoted companies leasing an asset – whether a computer, vehicle or property – would be required to account for it, giving greater transparency to investors.
Most UK firms, according to the experts at the British Vehicle Rental and Leasing Association (BVRLA), report to the UK’s generally accepted accounting principles (GAAP) anyway.
John Lewis, chief executive of the BVRLA, has been fairly dismissive of the new proposed standards: “The IASB has come up with a ‘one-size fits all’ proposal which means that a lease will be dealt with in the same way, whether it is a 10-year lease for an aircraft or building worth millions of pounds, or a three-year lease for a car worth £10,000.
“It is unfortunate that the standard-setters were unable to come up with a simpler way of accounting for short-term, low-value leases like those used for car leasing, which do not usually have a material impact on a company’s accounts.”
For chauffeurs and private hire companies, whether the asset (your car) is shown on your balance sheet or off is immaterial anyway. The benefit of contract hire is that it gives you access to a car for a set monthly fee - which helps your cash flow - there’s no worrying about selling the car when you want a new one (or writing it down in your books), and it’s highly VAT-efficient for VAT-registered businesses.
Did you know you can claim back 50% of the VAT on the rental fee if there is mixed private and business use, or 100% if all the use is for business? Many chauffeur cars would fall into the latter category. And with VAT rising to 20% in January 2011, that’s something worth thinking about.
Which brings me to my next point. Changes to the writing down allowances. The increase in VAT also happens to coincide with a move by the Chancellor George Osborne to reduce capital allowances from 20% to 18% (for cars with CO2 emissions below 160g/km) and from 10% to 8% (for all cars with CO2 emissions above 160g/km) from 2012 – that’s just one tax year away. This means that whether you are an owner-driver or a company, you will need to carry your cars on your balance sheet as a depreciating asset for many years – which will impact on your tax recovery ability.
Anyway, whether the asset is shown on- or off-balance sheet, the main point about contract hire is that it provides you with access to vehicles for a set monthly fee. You don’t have to worry about the residual value cost of the car; and it’s incredibly useful for cash flow – there’s no large lump sum needed to buy the car in the first place. Or possibly account for your private hire or chauffeur car years after you’ve sold it under the new lease accounting rules.