Financial reporting changes could force capital allowance reform

Discussions are taking place between leasing company representatives and HM Revenue and Customs (HMRC) that could trigger further reform of capital allowance rules in the light of proposed changes to international financial reporting standards.

Talks are at an early stage, but Gerry Keaney, chief executive of the British Vehicle Rental and Leasing Association (BVRLA), said: “We are working closely with the HMRC to give them a better understanding of the size and scope of the leasing industry and how the tax regime can be optimised to achieve the goals of policymakers and fleet operators.

“As part of this we are helping them to understand the potential impact of the proposed lease accounting changes.

“For example, under the new plans leasing companies would no longer have an asset, which would impact their ability to claim capital allowances.”

The removal of the tax relief benefit would, if taken at face value, mean a rise in contract hire rates due to the increased cost to leasing companies of acquiring vehicles.

In the second half of next year the International Accounting Standards Board and the Financial Accounting Standards Board are expected to announce a new common standard for accounting for all leases.

Known as the “right of use approach”, lessees will recognise an asset and a corresponding liability on their balance sheet.

The current “risk and rewards” approach only requires “purchase type” lease agreements to be reported on balance sheets, but under the proposals vehicles on contract hire (operating lease) will be drawn into that net.

The new approach, which could take up to four years before it becomes mandatory, will impact on firms that report to IASB standards and the public sector.

The changes will not, at this stage, apply to companies using UK Generally Accepted Accounting Practices to compile their financial accounts, but there may be some alignment in the future.

The Government’s most recent changes to capital allowances, which came into effect on April 1, 2013, have been the subject of much BVRLA protest with leasing companies ineligible for maximum tax relief and limited to 18% or 8% relief on a reducing balance basis depending on vehicle emissions.

Capital allowances enable companies to offset the cost of assets used in their business against taxable profits.

The BVRLA argues that under the proposed “right of use approach” to accounting the “asset” - a vehicle - becomes the property of the lessee and not the lessor.