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HMRC internal manual

Business Leasing Manual

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HM Revenue & Customs
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Defining long funding leases: the three tests: the lease payments test: minimum lease payments (CAA01/S70E)

The concept of the minimum lease payments is similar to that used for accounting purposes (BLM11010) but there is a statutory definition at CAA01/S70YE.

This section defines the minimum lease payments as the minimum payments under the lease over the term of the lease (BLM25100 onwards), including any initial payment, together with

  • in the case of a lessee - any residual amount guaranteed by the lessee or anyone connected with the lessee
  • in the case of a lessor - any residual amount guaranteed by the lessee or a person not connected with the lessor.

The residual amount is so much of the fair value of the asset as cannot reasonably be expected to be recovered by the lessor from the payments under the lease. The amount that is reasonably expected to be recovered is the present value of the minimum payments under the lease over the term of the lease. Note that the term of the lease is includes periods that are at the option of the lessee where, at inception, it is reasonably certain that the lessee will exercise that option.

If the proportion of the residual value that is guaranteed increases during the term of the lease see BLM22075.

In calculating the minimum lease payments, the part of any payment that represents charges for services or qualifying UK or foreign tax should be ignored (BLM20240).