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HMRC internal manual

Business Leasing Manual

HM Revenue & Customs
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Defining long funding leases: amendments, transfers and assignments: lease that is not a LFL - increase in proportion of residual amount guaranteed (CAA01/S70YD)

In the case of a lease that is not a long funding lease then a change in the accounting classification is, of itself, not very significant for tax purposes (see BLM32065). It may, however, indicate changes have been made to the lease which indicate that, in fact, a new lease has been entered into - see BLM22010.

However without specific rules it might be possible for a lessor to enter into a lease that is correctly classified as an operating lease at inception but then take out a residual value guarantee shortly afterwards. Had the guarantee been taken out - or been planned - at inception the lease may have been a finance lease and so is more likely to be a long funding lease.

CAA01/S70YD applies where

  • a lessor under a lease that is not a long funding lease,
  • enters into arrangements which increase (perhaps from nil) the proportion of the residual amount that is guaranteed, and
  • the arrangements would have made the lease a long funding lease had they been in place at inception.

Where this is the case, when the arrangements are put in place the lessor is treated as if the existing lease had terminated and a new one been entered into. The new lease is taken as the unexpired portion of the original lease.

The new lease will not necessarily be a long funding lease. For example, if the remaining term of the original lease, and so the term of the new lease, is less than 5 years the lease will not be a long funding lease.