A person may pay for an asset in instalments. If so the seller
may keep ownership of the asset until the last instalment has been
paid. A
hire purchase contract is a contract like that.
Another name for such a contract is a
lease purchase contract.
When a person buys an asset under a hire purchase type
contract the person cannot satisfy the ownership condition
CA23010 that has to be satisfied for the
expenditure to be qualifying expenditure for PMA while the payments
are being made. That is because ownership does not pass until the
last payment is made.
The legislation in Section 67 treats the person making the
payments under the contract as the owner of the asset as soon as
that person is entitled to the benefit of the contract. It also
stops anyone else, even the actual owner, being treated as the
owner of the asset for CA purposes. This means that when the buyer
/ lessee becomes entitled to the benefit of the contract the seller
has to bring a disposal value to account.
The legislation in Section 67 is very generous. It also lets
the person claim allowances on payments that have yet to be made as
soon as the asset is brought into use. This means that the person
can claim PMA now on payments that will be made in the future.
Example Bob enters into a contract on 24 May 2001
to buy a computer from Robbie. He pays £5,000 on 24 May 2001
when he enters into the contract and then there are five payments
of £1,000 at yearly intervals. He brings the computer into use
on 4 July 2001. Bob is treated as owning the computer from 24 May
2001 onwards; the date of the contract, and Robbie is treated as
ceasing to own it. Bob can claim PMA on the initial payment of
£5,000 then. He can claim PMA on the five payments on
£1,000 each of which he has still to make when he brings the
computer into use on 4 July 2001.
There are extra rules where the contract is a lease purchase
contract.
The person buying the asset under the lease purchase contract
(the lessee) is not treated as the owner of the asset during the
duration of the contract unless that person would treat the
contract as a finance lease in accordance with generally accepted
accounting practice.
For example, a contract that contains an option for the
lessee to buy the asset for market price at the end would not be
treated as a finance lease by the lessee. This means that the
lessee is not treated as the owner of the asset until they actually
buy the asset and so it cannot get PMA until it pays the option
price.
If the contract would not be treated as a finance lease by
the lessee, the lessee is not treated as the owner and cannot claim
PMA but the legislation that stops anyone else being treated as the
owner still applies. So if the seller has claimed PMA the seller
has to bring a disposal value to account.
A person may enter into two or more agreements that taken together satisfy the requirement that a person shall or may become the owner of an asset on performance of the contract. For example, a person whose religion forbids paying interest may buy an asset using alternative finance arrangements. These may involve two or more contracts that taken together give the buyer ownership of the asset on performance of the contracts. If so you should treat the agreements as a single contract to which the hire purchase legislation applies.
If the person stops being entitled to the benefit of the contract without ever becoming the real owner of the asset the person is treated as ceasing to own the asset. This means that the person has to bring a disposal value to account CA23330.
