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HMRC internal manual

Business Leasing Manual

HM Revenue & Customs
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Defining long funding leases: the three tests: the finance lease test: generally accepted accounting practice

The concept of GAAP is placed on a statutory footing for tax purposes by CTA10/S1127 for corporation tax and ITA07/S997 for income tax. These sections mean that

  • where an entity’s accounts are prepared under international financial reporting standards, it is those standards that are applied
  • in any other case then it is UK standards that are applied.

However, this definition is adapted for the purpose of the finance lease test so that where the person is not within the charge to income tax or corporation tax because they are not resident in the UK, or accounts are not prepared in accordance with international financial reporting standards or UK GAAP, then international accounting standards should be used (CAA01/S70N (3)).

The terms ‘UK GAAP’ and ‘international accounting standards’ (the statutory term used, in effect, to cover IFRS) are defined in FA04/S50 and ITA07/S997. It is unlikely you will need to study these definitions because it should be clear from the accounts which set of standards has been applied. However, if it is not clear then it may be necessary to establish which standard has been applied - which is a question of fact.

UK GAAP will also encapsulate those entities that adopt FRS101 or FRS102.