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HMRC internal manual

Business Leasing Manual

LFLs: commencement and transition: expenditure incurred before 19 July 2006

If the lease is not an excepted lease and there was a pre-existing heads of agreement for that long funding lease before 21 July 2005, the expenditure is split into two parts. The first part is expenditure incurred before 19 July 2006 and the other part expenditure incurred on or after that date.

The two parts are treated as if they had been incurred on providing separate assets.

The part relating to expenditure incurred before 19 July 2006 is treated as expenditure on an asset that is subject to an excepted lease and so the long funding lease legislation does not apply to it.

The other part is treated as if it had been incurred on an asset for leasing under a long funding lease to which the long funding lease legislation applies.

The rentals attributable to each asset are to be determined on a just and reasonable basis.

As a general rule, FA06/SCH8/PARA22 provides that the normal rules about when expenditure is incurred apply.

There may have been attempts to avoid the introduction of the rules for long funding leases by varying the terms of an agreement so that an obligation to pay which would have become unconditional on or after 19 July 2006 becomes unconditional before that date. If it were effective this would have the effect of treating the expenditure as relating to an asset that was to be subject to an excepted lease.

HMRC took, and still takes, the view that such a variation would not have that effect but this was put beyond doubt by an announcement on 22 March 2006. As a result, where the variation takes place on or after 22 March 2006 paragraph 22 (7) of Schedule 8 ensures that the expenditure is incurred on the date on which it would have been treated as incurred before the variation.