Policy paper

Income Tax and Corporation Tax: response to accounting changes for leasing

Published 6 July 2018

Who is likely to be affected

These changes are relevant to any business that is either a lessee or lessor of business assets, and in particular for those businesses adopting the new lease accounting standard, International Financial Reporting Standard 16 (IFRS 16).

General description of the measure

This measure makes technical amendments to a number of parts of the tax legislation following the introduction of IFRS 16. In brief, the measure makes technical changes to the following rules:

• long funding lease rules
• Corporate Interest Restriction (CIR) rules
• other rules which make reference to finance leases, included the tax rules for hire purchase contracts, oil activities, Real Estate Investment Trusts (REITs), and the sale of lessors rules

The measure also repeals section 53 of Finance Act (FA) 2011 which required businesses to prepare their tax calculations on the basis of the old accounting treatment. Where this results in a change in the basis of taxation, new rules are introduced to spread the transitional adjustment.

Policy objective

This measure provides certainty and stability for businesses.

A number of the tax rules depend on the classification of leases into operating leases and finance leases. Under IFRS 16, a business will not need to make this distinction in respect of leases where it is the lessee.

These amendments largely maintain the status quo notwithstanding the introduction of IFRS 16 and the repeal of section 53 of FA 2011, by ensuring that leases with the same terms are taxed in the same way regardless of the accounting framework the lessee has adopted.

The repeal of section 53 of FA 2011 means that businesses that apply IFRS 16 will not need to recalculate their accounting profits based on the old accounting treatment. This will benefit business by reducing administrative costs.

Spreading the tax effect of the transitional adjustment upon adoption of IFRS 16 protects Exchequer receipts whilst ensuring fairness for lessees regardless of which of the accounting options they choose.

Background to the measure

The International Accounting Standards Board issued IFRS 16 on 13 January 2016.

The government published a discussion document on 9 August 2016 seeking views on the options for tax responses to the introduction of IFRS 16. The discussion ran until 30 October 2016.

A summary of the responses to the discussion document was published on 1 December 2017. This set out the government decision that the rules relating to the leasing of plant and machinery would be amended to maintain the same tax outcomes, regardless of any changes in accounting treatment.

A further consultation was launched on 1 December 2017 in conjunction with the response document. The consultation asked various questions about how the legislation could be amended to retain the status quo and what the tax treatment of any transitional adjustments upon adoption of IFRS 16 should be.

On 1 December 2017 the government also published a consultation seeking views on how the CIR rules should be amended.

Both consultations closed on 28 February 2018. Summaries of the responses to both consultations, along with draft legislation, were published on 6 July 2018.

Further amendments which do not relate to leasing are being made to the CIR rules.

Detailed proposal

Operative date

These amendments have effect for periods of account beginning on or after 1 January 2019.

Transitional adjustments recognised upon adoption of IFRS 16 will be spread with effect for periods of account beginning on or after 1 January 2019, including where the lessee adopted the standard for an earlier period.

Certain amendments to the long funding lease rules only have effect for leases entered into on or after 1 January 2019.

Current law

The rules for plant and machinery allowances, including the long funding lease rules, are included in Part 2 of Capital Allowances Act 2001 (CAA 2001).

The CIR rules are in Part 10 of Taxation (International and Other Provisions) Act 2010 (TIOPA 2010).

The Income Tax rules for trading income are in Part 2 of Income Tax (Trading and Other Income) Act 2005 (ITTOIA 2005).

The Income Tax rules for property income are in Part 3 of ITTOIA 2005.

The Corporation Tax rules for trading income are in Part 3 of Corporation Tax Act 2009 (CTA 2009).

The rules for oil activities are in Part 8 of Corporation Tax Act 2010 (CTA 2010).

The rules for the leasing of plant or machinery are in Part 9 of CTA 2010.

The rules for Real Estate Investment Trusts are in Part 12 of CTA 2010.

The rule for the taxation of leases and changes to accounting standards is at section 53 of FA 2011.

Proposed revisions

Legislation will be introduced in Finance Bill 2018-19. The main elements of the legislative changes are as follows:

• amendments will be made to the long funding lease rules so that an IFRS 16 lessee with a long funding lease can calculate its capital allowance additions and rental restriction, and deal with any revaluation of the lease liability (amending sections 70E of CAA 2001, 70YI of CAA 2001, 148G of ITTOIA 2005, 377 of CTA 2010 and 381 of CTA 2010, introducing sections 148GA of ITTOIA 2005 and 377A of CTA 2010)
• any long funding lease held at the time that the new rules take effect will be grandfathered, meaning that it will continue to be taxed on the same basis as before (amending section 70YA of CAA 2001)
• the long funding lease rules will be amended to simplify the definition of a short lease and clarify the interest rate to use when applying the lease payments test (amending sections 70I of CAA 2001, 70O of CAA 2001, and 70YF of CAA 2001)
• the definition of a finance lease will be amended in the CIR rules, which will require an IFRS 16 lessee to classify their leases between operating and finance leases for CIR purposes (amending section 494 of TIOPA 2010)
• amendments will be made to the rules for oil activities and Real Estate Investment Trusts that will require, in certain circumstances, an IFRS 16 lessee to identify finance leases (amending sections 288 of CTA 2010, 331 of CTA 2010, and 544 of CTA 2010)
• the rules for identifying a hire purchase contract for capital allowances claims will be amended to require an IFRS 16 lessee to identify whether the contract would be accounted for as a finance lease (amending section 67 of CAA 2001)
• capital allowances anti-avoidance legislation and sale of lessor rules will be amended so that where those rules are relevant for a lessee they will require an IFRS 16 lessee to identify finance leases (amending sections 288J of CAA 2001 and 437 of CTA 2010)

In addition, legislation will be introduced in Finance Bill 2018-19 that will repeal the legislation at section 53 of FA 2011 concerning leases and changes to accounting standards. This will allow the amendments introduced for the introduction of IFRS 16 to take effect.

Legislation will be introduced in Finance Bill 2018-19 requiring a lessee to spread any transitional adjustment recognised upon adoption of IFRS 16 over the average remaining length of leases which have given rise to the transitional adjustment.

Summary of impacts

Exchequer impact (£m)

2017 to 2018	2018 to 2019	2019 to 2020	2020 to 2021	2021 to 2022	2022 to 2023
-	negligible	negligible	negligible	negligible	negligible

The measures are expected to have a combined negligible impact on the Exchequer.

Economic impact

The measure is not expected to have any significant economic impacts.

Impact on individuals, households and families

This measure has no impact on individuals and households because it only affects businesses. There is no impact on family formation, stability or breakdown.

Equalities impacts

It is not anticipated that there will be any impact on those with protected characteristics.

Impact on business including civil society organisations

By ensuring that tax rules align with IFRS 16, this measure helps business implement IFRS 16.

This measure is expected to have a negligible impact on all businesses who are lessees or lessors of business assets. One-off costs may be incurred due to familiarisation with the new rules and changes to reporting systems and processes to comply with the CIR changes. Specifically, businesses will need to classify their leases and some IFRS 16 adopters will need to compute a tax transitional adjustment using the information they obtained when they calculated their accounting transitional adjustment. Ongoing costs are expected to relate to classifying leases between operating and finance leases.

Repealing section 53 of FA 2011 means that companies using IFRS 16 will not be required to also maintain accounts prepared under earlier accounting standards for their leases.

There is no impact on civil society organisations.

Operational impact (£m) (HMRC or other)

It is anticipated that changes to HMRC Information Technology systems will be required. These changes have an estimated cost of approximately £400,000.

Other impacts

Other impacts have been considered and none have been identified.

Monitoring and evaluation

This measure will be kept under review through regular communication with affected taxpayer groups to ensure the legislation is operating as intended.

Further advice

If you have any questions about the CIR change, contact Jackie Phillips on Telephone: 03000 564340 or email: interest-restriction.mailbox@hmrc.gsi.gov.uk

For all other questions contact Ian Woodrow on Telephone: 03000 589538 or email: ian.woodrow@hmrc.gsi.gov.uk