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HMRC internal manual

Business Leasing Manual

HM Revenue & Customs
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Lease accounting: finance lease accounting: finance lessees: example 1: value of assets and liabilities in balance sheet

A particular point of interest worth noting from the accounting entries at BLM15525 is that the amount of the lease creditor is less than the book value of the asset. This is what would be expected, in particular where the loan implicit in the lease is being repaid over a relatively short period. It also underlines the point that, from the lessor’s standpoint, this sort of structure gives the provider of finance security beyond that provided by the financial standing of the lessee, see BLM00720.

If the value of the liability exceeds that of the asset (or the asset exceeds that of the liability, but only just so that it does not offer much comfort to the creditor bank) for a typical finance lease there may be a number of possible reasons, some wholly unrelated to tax. For example, it is very often the case that if the lessee looks a good credit risk the lessor will be indifferent to whether the asset provides adequate security.

But, because the tax treatment is allied to the accounting, two of these possible reasons have tax implications.

  • One reason is that the asset is being depreciated too quickly.
  • Another is that the allocation of interest is suspect (if the amount allocated to interest is ‘too high’, this depresses the amount allocated to loan repayments thus increasing the balance outstanding).

The effect in either case is likely to be to accelerate the deductions for lease rentals (though neither will affect the sums ultimately deductible) and it may be appropriate to consider, together with your compliance accountants, whether (and if so how) the treatment in the accounts should be questioned.