Leasing tax changes will affect fleet account books

Fleet managers will need to prepare for changes to tax rules if new global lease accounting standards are introduced from January 1, 2019.

The International Accounting Standards Board (IASB) wants to see all leased assets (including vehicles on operating leases) brought on to the balance sheet, with the aim of giving a more complete picture of a company’s financial position.

Discussions have dragged on for more than nine years, with several draft standards published and revised.

The IASB is set to publish the final standard next month and, if approved by the European Parliament, it will have a knock-on effect on UK tax rules, according to HMRC.

The Government passed legislation in 2011 to pre-empt the introduction of the new lease accounting standards. This requires any companies choosing to ‘early adopt’ the new standard – possibly as early as spring 2016 – to continue preparing their accounts using the old rules.

However, HMRC has confirmed that this is “intended to be a short-term measure only” while it addresses the implications of the new lease accounting standard.

A spokesman said: “It is expected HMRC will have to make some changes to tax rules in response to the new standard. 

“On the basis of what is currently expected to be in the new standard, a number of options are being explored, but no decisions have been made by ministers as yet. 

“HMRC will engage with businesses to ensure changes do not impact unnecessarily or inappropriately on commercial transactions.”

Julian Rose, founding director of Asset Finance Policy, believes that the probability of the much delayed new standard being introduced is “high” and that the implications could be far-reaching.

“International Accounting Standards only affect listed companies in the UK and a few others like banking groups,” he told delegates at the International Auto Finance Network autumn conference. 

“But it won’t be long, in my view, before it gets rolled out to affect all companies in the UK.”

Smaller businesses are likely to be the last to be affected, as the next revision of International Financial Reporting Standards for SMEs is due in 2018.

The UK’s Financial Reporting Council will then decide how and when any changes to lease accounting will be incorporated into UK accounting standards.

Rose suggested that about £5 billion pounds worth of vehicle leases could go on to the balance sheets of leasing companies’ fleet customers from next spring onwards.

It is unlikely to have any impact on whether companies continue to use contract hire, but Rose raises concerns about the complexity of the standard.

“Two companies could have operating leases for the same cars but, because the length of the lease might be different, you end up with a very different figure on the balance sheet,” said Rose.

Further issues might arise due to front-loading, where the cost of the lease is higher in the early part of the contract, while there is also a discrepancy between the standards in Europe and America.

Consequently, the new standard could cause confusion over the figures on the balance sheet. If this uncertainty spreads to investors, companies might start questioning whether to continue leasing company vehicles.

“It’s not about whether their assets have gone up on the balance sheet, it’s whether the figures are certain and whether you can predict and explain them,” said Rose.

Leasing companies will need to support fleet managers by providing the numbers they need for their accounts.

They will also have to bear in mind that services which aren’t separated out today, such as maintenance and repair, may have to be separated out in the future.

Gerry Keaney, BVRLA chief executive, said: “BVRLA members already advise customers on how to reduce fleet costs and emissions and we remain confident that they will continue to add value by helping fleets with any additional reporting requirements.”

Keaney believes the new rules “will have a very limited impact on the popularity or method of leasing in the UK” and that it will be “business as usual” for the vast majority of the fleet sector if the new standard comes into force.