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HMRC internal manual

Business Leasing Manual

Defining long funding leases: basic definition: no requirement for symmetry between the parties and rules applying to lessees (CAA01/S70Q and S70H)

The tests for a long funding lease are carried out independently by lessors and lessees. So a long funding lease for a lessor may not be a long funding lease for the corresponding lessee.

Without further action this could enable both lessor and lessee to obtain capital allowances as it would be possible for the lessor to treat the lease correctly as a lease that is NOT a long funding lease (and claim capital allowances) and for the lessee to treat the lease correctly as a lease that IS a long funding lease (and claim capital allowances).

CAA01/S70Q Leases excluded by right of lessor etc to claim capital allowances

CAA01/S70Q acts to prevent two claims to capital allowances on the same asset. Priority is given to the lessor, so if the lessor can claim capital allowances (or, with some exceptions, could claim them if it was within the charge to UK tax) then the lessee cannot. These rules also apply to chains of leases (head lease, sub-lease, sub-sub-lease and so on) ensuring that only one party can ever be entitled to claim capital allowances. Guidance on these rules is at CA23820 including details of exceptions to the basic rule.

CAA/70H Lessee: requirement for tax return treating lease as long funding lease

CAA01/S70H states that, in the hands of a lessee, a lease is only a long funding lease if it makes a return for the ‘initial period’ - see BLM20120 - on the basis that the lease should be taxed as a long funding lease. This allows lessees to stay outside the long funding lease regime if they wish.

If the lessee chooses not to treat the lease as a long funding lease it may claim a deduction for lease rentals in the normal way, see BLM20120. Once a lessee has made a return on the basis that a lease is not a long funding lease, then that establishes the nature of the lease in the lessee’s hands. The lessee can change its mind within the period allowed for amending the return of the ‘initial period’, see BLM20120, and make the necessary amendment, but it is otherwise bound by the treatment adopted for that lease in its future returns.

On or after 13 December 2007

Due to avoidance arrangements involving the mismatch of lease chains (see BLM63010) being adopted, Section 70H was amended for intermediaries in lease chains - see BLM20120.