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HMRC internal manual

Business Leasing Manual

HM Revenue & Customs
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Introduction: Lease taxation: Lease not Long Funding Lease: Finance lessees

As a matter of law (or form) the gross rentals payable by a lessee are revenue in nature and allowable in computing profits (to the extent that the asset is used for the purposes of the lessee’s trade), even though the substance may be the repayment of a loan.

In the case of finance lessees (and just as with finance lessors), generally accepted accountancy practice divides the rentals into an ‘interest’ element and a ‘capital’ element (BLM00215 onwards).

Generally, the total deductions in the profit and loss account in respect of the leased asset (the finance charge plus lease depreciation) will equal the lease rentals over the life of the lease (there is an exception in the case of sale and finance leaseback, see BLM35025) - but they are not necessarily equal in any one accounting period.

Where a finance lessee accounts for a transaction on the basis of GAAP the deduction of rentals equal to the finance charge (‘interest’) and the depreciation charge relating to the leased asset in the accounts will normally be the appropriate way of achieving a spread of the lessee’s gross rentals which is consistent with the accruals concept. Circumstances in which the lessee’s depreciation policy and practice may need to be checked are discussed at BLM32500 onwards.

HMRC’s view of the tax treatment of a finance lessee’s rentals was first formally set out in Statement of Practice 3/91. In effect it says that a deduction for the lease rentals is allowed when the depreciation and finance charges are passed through the profit and loss account. The cases of Gallagher v Jones and Threlfall v Jones (66TC77) confirmed this view is correct.

Note that different rules may apply if the lease is a long funding lease, see BLM20000. There is also an exception for expensive cars, see BIM47715 and BIM 47725.