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HMRC internal manual

Business Leasing Manual

Introduction: Lease taxation: Lease not Long Funding Lease: Operating lessors

The tax treatment of an operating lessor’s rentals follows GAAP unless the lease is a long funding lease of plant or machinery (outline at BLM00550 and detail at BLM20000), in which case the tax treatment is very different (BLM40000 onwards).

Generally accepted accounting practice recognises (gross) rentals, typically on a straight-line basis over the period of the lease, and so this is the approach taken for tax.

The accounts show depreciation of the asset as an expense in the profit and loss account. Depreciation of a capital asset is, of course, not an allowable deduction for the purpose of computing profits or losses. This follows from the basic principle that income tax excludes capital items.

Although depreciation is not an allowable deduction, capital allowances may be available to the owner of assets leased out under operating leases.