HMRC internal manual

Business Leasing Manual

BLM00525 - Introduction: Lease taxation: Lease not Long Funding Lease: Finance leases

Unless the lease is a long funding lease (see BLM20000 onwards) the tax treatment of finance leasing is different from the accountancy because it generally follows the legal form. That is, the tax system generally regards the finance lessor as the owner of the asset and, therefore, as the person entitled to any capital allowances. The lessee is not entitled to capital allowances except where CAA01/S67 (hire purchase etc) applies and, instead, the lessee is regarded as paying rentals for the hire of the asset.

Therefore, where the lease is not a long funding lease, for tax purposes the finance lessor has leased the asset to the lessee for a revenue hire charge. Hence, the gross rentals due under a finance lease (‘interest’ plus ‘capital’ repayments) are all on revenue account. The gross rentals are

  • all taxable as income in the hands of the finance lessor (the capital cost of the leased asset may qualify for capital allowances; in a plant or machinery case the cost of the asset should normally equal the capital element in the rentals)
  • deductible as revenue expenses in the hands of the finance lessee to the extent that the leased asset is used for the lessor’s trade.

Where the finance lease is a long funding lease the tax treatment follows the substance, and so the accounting treatment, of the transaction (BLM40000).