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HMRC internal manual

Business Leasing Manual

Introduction: Lease taxation: Basis for recognising trading income

Sir Thomas Bingham MR gave a helpful summary of the state of the trading income position in 1993 in Gallagher v Jones (66 TC 77). An important part of his judgment starts at page 123B:

“Conclusions: Despite the length of this judgment, the central issue is at root a very short one. The object is to determine, as accurately as possible, the profits or losses of the taxpayers’ businesses for the accounting periods in question. Subject to any express or implied statutory rule, of which there is none here, the ordinary way to ascertain the profits or losses of a business is to apply accepted principles of commercial accountancy. That is the very purpose for which such principles are formulated. As has often been pointed out, such principles are not static: they may be modified, refined and elaborated over time as circumstances change and accounting insights sharpen. But so long as such principles remain current and generally accepted they provide the surest answer to the question which the legislation requires to be answered. As Pennycuick V.-C. pointed out in Odeon Associated Theatres Ltd. v Jones 1 WLR 442, different considerations arise where there is no accounting evidence or where there are two or more principles either or any of which is generally accepted. But those considerations do not apply here.” 

The same principles are applied to property leasing income except where there are statutory rules to the contrary. For example, premiums paid for the grant of leases which run for less than 50 years: CT09/S212 and ITTOIA05/S277 (see PIM1200).

However, unless the lease is a long funding lease of plant or machinery (BLM00545 and BLM20000) or Part 21 CTA 2010 / Part 11A ITA 2007 applies (BLM70000), the taxation of finance lease rentals is essentially based on the rentals receivable, rather than on the accounting treatment, see BLM33010.