The interaction of the treatment of finance leases below the accounting requirements and its remedy beneath the earnings tax law raises a quantity of challenges for the operation of the expense setting rules in Division 705 of the Revenue Tax Assessment Act 1997 (ITAA 1997). The TOFA rules are a new set of tax guidelines the broad intent of which is to address tax non-neutralities and market distortions triggered by the ad hoc remedy of the taxation of monetary arrangements more than the years and, also, from rapidly evolving structured monetary product markets.
That stated, money flow from operations will contain only the interest portion of the capital-lease expense. Tax rulings have been issued by the ATO that seek to differentiate amongst a sale of the asset and a lease. In terms of this section 23C it is needed that the VAT portion of expenditure is excluded from the quantity recognised for Income Tax purposes if the taxpayer was entitled to an input tax deduction.
In Income & Customs Brief 37/12, issued on 3 January 2013, HMRC confirmed that no action is required in the UK in response to the European Court of Justice selection in the Eon Aset Menidjmunt case. The court rejected this argument as it was happy that the dominant goal of the transaction was not tax associated, as it was to retire debt and make the balance sheet seem significantly less leveraged.
Obviously exactly where the client leases a motor vehicle, no VAT can be recovered and the complete amount would be capitalised for accounting purposes. There is an original invoice from the dealer for the finance comapny for the price of the van. There are various treatment options for tax and accounting purposes, based on the sort of finance contract entered into, and these will have to have to be regarded as with each other with the VAT treatment.
Under a lease agreement, the lessee pays the rental but does not acquire ownership or equity in the car. VAT, if applicable, will be chargeable on periodic lease payments, regardless of whether the lease is treated as a finance lease or as an operating lease.