BLM10011 - Lease accounting: accounting standards: commercial benefits of leasing
This manual is being updated to reflect FRS 102 (2024 amendments). For guidance on the tax treatment of accounts prepared under IFRS 16 or the revised FRS 102, please refer to pages within the BLM50000 chapter.
Whether to lease or borrow
Potential lessees have various choices in addition to leasing an asset. They could borrow all or part of the money and buy the asset themselves, so getting the benefit of capital allowances (where eligible). The lessee’s tax position is one factor that may influence which method of finance is selected. A lessee who has no current tax liability, or who pays tax at less than the full rate of corporation tax, is more likely to benefit from leasing than one who is taxable at the full rate. This is because, where the lessor is eligible to claim, they may pass on the benefits of their capital allowances to the lessee by means of a corresponding reduction in rents. Where very expensive assets are leased (‘big ticket’ leasing), even small timing differences can be important.
Working out the pros and cons of leasing over buying is a complex and fact-dependent commercial decision for customers in each case, and one over which lessees often take professional advice. From a compliance perspective neither method is preferred over the other, but it is essential to correctly apply the legislation to the method chosen to provide plant or machinery.
There are many situations where leasing has been used to avoid tax. These are outlined at BLM01000 onwards and involve both timing advantages and absolute advantages.
Where tax avoidance is involved you should very carefully consider the facts and relevant law and follow the appropriate guidance.
Please contact a leasing technical adviser in CTI&G if you think there is avoidance but cannot find appropriate guidance.
Improving the appearance of balance sheets
The somewhat arbitrary distinction between operating and finance leases made it difficult for investors to compare companies. Under IAS 17 Leases and FRS 102 (pre 2024 amendments), operating leases do not feature on the lessee’s balance sheet. In contrast, if the lease is a finance lease, both the asset and the associated liability appear on the lessee’s balance sheet.
To address concerns, IFRS 16 Leases was introduced and became mandatory for IFRS reporters for accounting periods beginning on or after 1 January 2019. It superseded IAS 17 and introduced significant changes to lessee accounting, recognising right-of-use assets and lease liabilities arising from all but exempt lease agreements on the balance sheet. FRS 102 (2024 amendments), effective from 1 January 2026, adopts the on-balance sheet model already used in IFRS 16, with some simplifications.
Further details on FRS 102 (2024 amendments) Section 20 and IFRS 16 can be found at BLM17000.