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HMRC internal manual

Business Income Manual

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HM Revenue & Customs
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Leasing: avoidance: assets other than land: calculation of tax deduction

S681CC Income Tax Act 2007, S865 Corporation Tax Act 2010

The restriction on the deduction allowable for payments under a lease within the leased trading assets legislation is calculated as follows.

(1) For Income Tax purposes, the periods mentioned in 1-5 below are periods of account of the trade or, if no accounts are drawn up for a period, the basis period of a tax year. For Corporation Tax purposes the periods are accounting periods.

(2) For any period, amount E is the expense or total expenses to be brought into account for the period in accordance with generally accepted accounting practice in respect of the payment or payments under the lease.

(3) Calculate the total of amount E for the period and every previous period ending on or after the date of the creation of the lease.

(4) Calculate the total of the deductions allowed for every previous period ending on or after the date of the creation of the lease.

(5) Subtract the total at (3) above from that at (2) above.

The allowable deduction is equal to the lower of the amount in (4) above and the commercial rent for the period.

If, for the period in question and every later period, there are no payments under the lease, (5) above does not apply and no deduction is allowed for the period.