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HMRC internal manual

Business Leasing Manual

Lease accounting: finance lease accounting: outline

Finance lessor

The finance lessor owns the asset but does not show it in its balance sheet. The lessor only shows the ‘loan’ it has made in its balance sheet. This is generally the cost of the leased asset.

The finance lessor’s earnings are the ‘interest’ on the loan (the interest element in the rentals):

  • the capital element in the rentals is the ‘loan repayments’ which go to the balance sheet to write down the debt;
  • the ‘interest’ earnings are allocated to each year in proportion to the outstanding debt in each year.

Finance lessee

The finance lessee does not own the asset but shows it in its balance sheet as if it did (which is the economic substance if not, technically, the legal position). The finance lessee also shows the capital owed to the finance lessor as a debt.

In its profit and loss account the finance lessee

  • charges the ‘interest’ element in the rentals in the same way as any other loan interest
  • does not charge the capital element in the rentals: they are treated as loan repayments which go to reduce the debt to the finance lessor included in the balance sheet
  • but instead charges depreciation on the asset.

Off balance sheet finance remains available using specialised operating leases, see BLM00060.

The accountancy treatment has no effect on the lessor’s title to capital allowances (which depends on the legal ownership) except where the lease is a long funding lease, see BLM20000 onwards, or falls within CAA01/S67, see BLM00325 onwards.