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HMRC internal manual

Business Leasing Manual

Defining long funding leases: introduction: outline of tax regime

The effect of the long funding lease regime introduced by FA 2006 is to tax certain leases (known as ‘long funding leases’) by reference to their commercial substance. Therefore

  • long funding lessors are taxed in a similar way to the way in which they would have been taxed had they made a loan. This is more obvious with finance leases than with operating leases.
  • long funding lessees are taxed in a way that is similar to the way in which they would be taxed had they purchased the asset using loan finance. Again, this is more obvious with finance leases than with operating leases.

Identifying a long funding lease

In very broad terms

  • the basic concept is that funding leases are leases that perform a financing function. Commercially they are broadly equivalent to a secured loan. They include finance leases and some operating leases.
  • long funding leases, to which the new rules apply, are funding leases with a term of more than 5 years, or in some cases 7 years.

Effect of the legislation

The effect of the legislation is to align the tax treatment more closely with the economic reality of the transaction. Thus

  • capital allowances are not available to the finance provider (the lessor); instead they are usually available to the person who bears most of the economic risks of ownership (the lessee);
  • the finance provider (the lessor) is taxed on a figure that is closely related to its commercial profit, period by period;
  • where capital allowances are available to a lessee, the lessee is entitled to relief for only part of the lease rentals.