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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: amendments, transfers and assignments: change in accounting classification of a long funding lease (CAA01/S70YA)

Only very rarely will the accounting classification of a lease change, but it may happen - for example, where accounting standards change and require the new standard to be applied to existing leases. Where this happens it is necessary to have rules to ensure that the tax treatment of the lease remains fair.

It is clear that, as nothing may have changed in the lease agreement itself, a change in accounting treatment does not mean that a lease has terminated and another has begun. However, for the rules taxing long funding leases to work it is necessary to treat the lease as having been terminated and a new one begun at the point the accounting treatment changes. These rules apply to both lessors and lessees.

This is catered for by CAA01/S70YA. The rules are not as simple as might at first be thought.

The basic proposition is that where, in the relevant accounts, the accounting classification changes from an operating lease to a finance lease, or vice versa, the lessor (or lessee, as appropriate) is treated as terminating the existing lease and entering into a new lease at the time of the change.

There are two situations where the classification of a long funding lease changes for the purpose of this section

  • Situation 1 - where the lease changes from being accounted for as a finance lease or loan to being accounted for as an operating lease in the relevant accounts,
  • Situation 2 - where the lease changes from being accounted for as an operating lease to being accounted for as a finance lease or loan in the relevant accounts.

The relevant accounts are

  • the accounts of the person concerned, or
  • where that person is a lessor, the accounts of any person connected to the lessor.

CAA01/S70Y(7) allows the Treasury to make regulations restricting the operation of CAA01/S70Y. No regulations have yet been made.