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HMRC internal manual

Business Leasing Manual

Lease accounting: lease classification: the term of a lease

The term of the lease can be very important for tax purposes. For example, it determines the period over which a finance lessee should depreciate the leased asset (unless the expected useful life is less), and so the period over which a lessee may obtain a deduction for the capital element of the lease rentals.

UK GAAP

SSAP 21 defines the term of a lease as:

“the period for which the lessee has contracted to lease the asset and any further terms for which the lessee has the option to continue to lease the asset, with or without further payment, which option it is reasonably certain at the inception of the lease that the lessee will exercise.”

The Guidance Notes express this as:

“The lease term is the primary period of the lease (i.e., the non-cancellable part) together with any secondary periods during which the lessee has the contractual right to continue to use the asset and which right, at the start of the lease, it is reasonable to expect him to exercise.”

For those applying FRS102, the FRS102 glossary defines ‘lease term’ as:

“The non-cancellable period for which the lessee has contracted to lease the asset together with any further terms for which the lessee has the option to continue to lease the asset, with or without further payment, when at the inception of the lease it is reasonably certain that the lessee will exercise the option.”

IFRS and FRS101

IAS 17 defines the term of a lease in very similar terms to SSAP21, and identically to FRS102, as:

“the non-cancellable period for which the lessee has contracted to lease the asset together with any further terms for which the lessee has the option to continue to lease the asset, with or without further payment, when at the inception of the lease it is reasonably certain that the lessee will exercise the option.”

It also provides that:

“a non-cancellable lease is a lease that is cancellable only:

  1. upon the occurrence of some remote contingency;
  2. with the permission of the lessor;
  3. if the lessee enters into a new lease for the same or an equivalent asset with the same lessor; or
  4. upon payment by the lessee of such an additional amount that, at inception of the lease, continuation of the lease is reasonably certain.”