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HMRC internal manual

Business Leasing Manual

From
HM Revenue & Customs
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Defining long funding leases: exclusions from the definition of funding lease: CAA01/S70J (3) - (6)

A lease is not a funding lease (and therefore cannot be a long funding lease) if

  • it is a hire purchase or lease purchase contract to which CAA01/S67 applies (CAA01/S70J (3)), see BLM00325 onwards, or
  • the plant or machinery has previously been leased out by the current owner, where none of the previous leases was a funding lease and the aggregate of the terms of the previous leases was more than 65 per cent of the useful economic life of the asset when first leased out (CAA01/S70J (4) and (5)).

In addition, in the case of a lessor, a lease is not a funding lease if

  • the plant or machinery was leased for at least 10 years before 1 April 2006, and
  • the lessor under the plant and machinery lease was also the lessor of the plant or machinery on the last day before 1 April 2006 when the plant or machinery was leased (CAA01/S70J (6)).

See BLM20410 for an example.

Capital expenditure may be incurred on updating or improving an asset that has been subject to a lease for 10 years before 1 April 2006. In considering whether this capital expenditure is covered by s.70J (6) the item of plant or machinery should be looked at as a whole, rather than as a set of component parts. As long as the expenditure is not on, or does not create, a separate asset then s.70J (6) will apply if the plant or machinery as a whole has been leased out for 10 years before 1 April 2006. See BLM20415 for an example.

Exceptionally, if a separate asset is created by the ‘improvements’ CAA01/S70L will apply to create a derived lease – see BLM20300 onwards.