How to record an asset bought on hire purchase

Sometimes you don't buy an asset outright, but buy it over time on a lease purchase or hire purchase (HP) agreement. This article explains how to record the asset in FreeAgent.

Please note, this only applies to assets you're buying, not to those you're hiring. It can be difficult to distinguish between the two if the legal arrangement for the asset is complex. Check with your accountant if you're unsure.

Set up a new bank account for the hire purchase agreement

Begin by setting up a new bank account. To do this, navigate to the 'Banking' tab at the top of the screen and select 'Bank Accounts' from the drop-down menu.

From the 'Bank Accounts Summary' page, select 'New' and choose 'Bank Account'.

Enter an ‘Account Name’ that clearly describes the asset, for example, ‘Computer Hire Purchase’, and don't tick either the 'This is a personal account' or 'Make this my primary account' checkboxes.

If you're buying several different assets on hire purchase, set up a new bank account for each one.

Add the asset as a bill

Next, add the asset as a bill and select one of the capital asset categories.

For example, if you've bought a computer on hire purchase that cost £1,000 + VAT (which is a total of £1,200), you would enter the computer as a bill, using the ‘Computer Equipment Purchase’ category.

Ideally, you would also attach a copy of the hire purchase agreement. To upload a scanned image of the agreement, choose 'Select a file' from the 'File to attach' area. 

If you have a receipt, invoice or bill saved as an image file (PNG or JPEG) or PDF on your mobile device, or as an email attachment, you can import it into your 'Files' area using the FreeAgent mobile app. Then upload the imported file by selecting 'Choose from saved files' instead and follow the instructions. Please note that you won't be able to use the FreeAgent mobile app if you have an unincorporated landlord account.

Set up a bill payment and mark it as paid

Next, set up a bill payment from the hire purchase bank account that you created for the asset, and mark the bill as paid with a manual bank transaction dated the same day as the bill.

Do not use the 'Add a manual payment' button when you're entering the bill payment, as you won't be paying it from the primary bank account.

Paying off the hire purchase loan

As you pay off the asset each month, you will need to explain each payment in your main bank account in FreeAgent as a ‘Transfer to Another Account’, the other account being the hire purchase account. 

Recording interest on the hire purchase agreement

If you are paying interest on the hire purchase agreement, you will also need to enter a monthly manual bank transaction from the hire purchase bank account using the 'Payment' type and 'Interest Payable' category.

Calculating VAT

By following the steps above, FreeAgent will calculate the VAT correctly if you are invoice accounting for VAT.

Please note that HMRC also states that if you're buying an asset on hire purchase, even if you're normally cash accounting for VAT, you should account for VAT on the invoice basis when you "buy or sell goods using lease purchase, hire purchase, conditional sale or credit sale".

How you account for the VAT if you're cash accounting will depend on the VAT invoice that the asset supplier provides.

If they provide just one VAT invoice for the asset itself, then you won’t need to take any further action.

In the event that the supplier provides a schedule of VAT invoices, with, in effect, a VAT invoice for each month's payment, you will need to create journal entries.

To do this, once you've recorded the original purchase of your asset, create two journal entries dated the same day as your asset purchase, to move the full amount of the VAT to the Deferred VAT account using the following:

• Credit code 818 - ‘VAT Reclaimed’
• Debit code 823 - ‘Deferred VAT’

Then, each month, once you've recorded your payment, create journals for the VAT on that payment only (your schedule from your hire purchase company will show the amount), debiting code 818 and crediting code 823.

If you’re unsure about how to record your VAT entries, ask your accountant.