Hi Mark

Can you advise on how the cash flows work and what entries need to be made on solar accounts under this scenario?

Our business has entered into a Hire Purchase agreement as detailed:

Vatable value £12,500
VAT @ 17.5% £ 2,187.50

Sub-total £14,687.50

Plus First Reg fee £ 55.00
Plus 12mths tax £ 200.00

Sub-total £14,942.50

Less deposit paid £ 3,442.50

Due on finance £11,500.00

The interest cost of credit is £1873.20, making the total left to pay £13,373.20 over 48 months.

I understand that the IR treats such acquisitions as the company owning the asset from the outset and that 100% of the VAT element is claimable now.

I would be grateful if you could run through the book-keeping entries for solar accounts.

Hi Ellie,

Let's assume you are purchasing a motor vehicle. (For other asset types use appropriate account names). Firstly create a Hire Purchase Liability account. Then at the start of the hire-purchase period create 3 transactions:

1. A Money Paid Out transaction from the 'Hire Purchase Liability' account to the Motor Vehicles asset account for £14,687.50. Set the VAT rate to 17.5%

2. A Money Paid Out transaction from the Cheque Account to the Motor Expenses account for £255. Set the VAT rate to 0%

3. A Money Paid Out transaction from the Cheque Account to the Hire Purchase Liability account for £3,187.50. Set the VAT rate to 0% and the VAT Treatment to 'Out of Scope'.

Now let's assume you pay £278.61 each month and that this amount includes £39.03 interest. Record 2 transactions each month:

1. A Money Paid Out transaction from the Cheque Account to the Hire Purchase Liability account for £239.58. Set the VAT rate to 0% and the VAT Treatment to 'Out of Scope'. This records paying off some of the loan principal.

2. A Money Paid Out transaction from the Cheque Account to the Interest Charges expense account for £39.03. Set the VAT rate to 0% and the VAT Treatment to 'Purchase of Goods or Services from UK Supplier'. This records payment of the interest.

Note: You should check this treatment with your accountant as he/she may prefer a different method of recording the transactions.

Cheers,

3. A Money Paid Out transaction from the Cheque Account to the Hire Purchase Liability account for £3,187.50

Where does this figure of £3187.50 come from how is it calculated?

many thanks

lynn

Hi Lynn,

Ellie paid an initial deposit of £3,442.50. Of this amount, £255 was for vehicle expenses and the remaining £3,187.50 was used to pay off the loan.

Regards,