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HMRC internal manual

Business Leasing Manual

Lease accounting: leasebacks and sub-leases: lease and leaseback

A lease and leaseback is almost certainly part of a scheme to avoid tax, whether the leaseback is an operating lease or a finance lease.

With effect from 31 December 2001, the IAS accounting treatment of lease and leaseback transactions is governed by the provisions of SIC 27 ‘Evaluating the Substance of Transactions involving the Legal Form of Lease’. The SIC takes the view that transactions that are linked in such a way that the effect cannot be understood without reference to the series of transactions as a whole, should be accounted for as one transaction. The SIC illustrates the principle by describing a number of extreme examples. The view taken is that a sequence of transactions that do not convey the right to use an asset should not be accounted for as a lease. Therefore, if a party’s right to use an asset is the same after a series of transactions as before them, the arrangements will fall outside the scope of IAS 17. Accordingly, the accounting treatment should follow the substance of the arrangements taken as a whole.

In many respects, the principles underlying SIC 27 are similar to the general principles set out in UK accounting standard, FRS 5. However, whilst FRS 5 is concerned with general principles that affect the interpretation of all types of arrangements, SIC 27 is concerned with the application of these principles to the specific circumstances of lease and leaseback arrangements.

Particular difficulties arise where the head lease involves a premium.

You should seek advice from your accountant if the accounting treatment of a lease and leaseback arrangement is material.