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HMRC internal manual

Business Leasing Manual

From
HM Revenue & Customs
Updated
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Introduction: why lease: basic tax advantages of leasing

In the case of a business loan the lender is simply liable to tax on the interest received. In the case of an equivalent finance lease of plant or machinery the lessor is liable on the total rents (‘loan repayment’ plus ‘interest’) minus the capital allowances (unless the lease is a long funding lease - see BLM20000 onwards).

Therefore, in a typical finance lease the lessor generates tax losses followed by tax profits. Over the term of the lease the profits less losses equal the commercial profits which are, in turn, roughly the same as the profits that would be made on a loan. However, because there are tax losses followed by tax profits this generates a timing advantage that can be very significant and so carry a substantial value.

That value is passed on to the lessee in the form of reduced rentals. It is not uncommon for the ‘interest’ under a finance lease to be 1.5% less than the interest on an equivalent loan. So, for example, a large and credit-worthy lessee might be able, in effect, to borrow at LIBOR less 1%, rather than LIBOR plus 0.5%.

Similar advantages may arise under certain operating leases, particularly those that supply off balance sheet finance.

The sensitivity of lease rental rates to the tax regime, especially the capital allowances rules, is illustrated by the provision usually found in leases for expensive items of equipment (known as ‘big ticket’ leases) whereby the lessor is able to adjust the rentals if there are changes in the tax provisions affecting the lessor or if the lessor fails to obtain the expected capital allowances.

More detailed guidance on the tax advantages of leasing are at BLM30005.

These tax advantages can prove particularly attractive to overseas lessees and this can result in a cost to the UK Exchequer that is not matched by benefits. Guidance on overseas leasing, and the need to provide information to CTIS (CT&BIT), is at BLM31000.