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HMRC internal manual

Business Leasing Manual

Lease accounting: leasebacks and sub-leases: sub-leases and back-to-back leases

Not all leasing arrangements involve one lessor and one lessee. It is quite possible (and commercially common) for a number of parties to be involved so that A leases to B who leases to C and so on. There are a number of ways in which this might arise:

  • each lease may be entered into at the same time.
  • A may enter into a lease with B who later enters into a sub-lease with C; the lease between A and B becomes the head lease.
  • B may enter into a lease with C and, at a late date B may enter into a head lease by selling the leased asset to A and leasing it back.
  • A may enter a lease with C and at a later date B is interposed so that A leases to B who sub-leases to C.

These arrangements may be entered into for perfectly ordinary commercial reasons. Forexample a car-rental company may lease 100 cars from a head lessor and lease them on to 100 individual lessees.

Chains of leases are also a common feature of avoidance schemes.

There are many variations on these arrangements involving combinations of finance leases operating leases or both. Furthermore the rentals, rights and obligations under each lease can vary substantially and it is not possible for the accounting standards to give detailed guidance on each type. The guidance notes to SSAP 21 set out principles that should be followed, as outlined at BLM16040.