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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: election: introduction to SI2007/304

As the name implies, the rules for taxing long funding leases do not normally apply to short leases.

During the consultation period leading up to the enactment of rules for taxing long funding leases, the leasing industry asked the Government to consider allowing lessors, but not lessees, to elect for short leases to be taxed as long funding leases. Such an election allows lessors to remove a distortion whereby lessors of short-lived assets receive relief via capital allowances at a slower rate than they depreciate. For example, if an asset has a life of 5 years the written down value at the end of year 5 is about 24% of cost. At the end of a 5-year lease the lessor has not received relief for 24% of the cost of the asset and yet no further income will be received. The lessor will receive relief later on, but that delay carries a cost.

An election for short leases to be taxed as long funding leases has the effect that the lessor is taxed on its commercial profits over the life of the lease. In contrast, where the lessor claims capital allowances they are likely to be claimed over a period longer than the lease term. This means that over the life of the lease the lessor is taxed on more than its economic profit, and only when the capital allowances are fully claimed is the lessor finally taxed on its economic profit. This delay in receiving relief may affect pricing of the lease rentals.

An election may also have the practical effect of allowing lessors to be taxed on the basis of the profits shown in the accounts. This may reduce the taxpayer’s administrative burden and is covered at BLM24305.

If an election is made, all eligible leases and qualifying incidental leases (BLM24095 onwards) are treated as long funding leases in the handsof the lessor. An election does not directly affect the lessees BLM24020.

The rules for electing for leases of plant or machinery to be treated as long funding leases are in SI2007/304.