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HMRC internal manual

Business Leasing Manual

From
HM Revenue & Customs
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Defining long funding leases: election: effect on lessee

An election by a lessor does not generally affect whether a lease is a long funding lease in the hands of the lessee and it has no effect on whether the leased asset is plant or machinery in the hands of the lessee.

Is the lease a long funding lease?

Lessees are not generally affected by a lessor making a long funding lease election. Where an election is made, eligible leases and qualifying incidental leases become long funding leases in the hands of the lessor only.

Furthermore, as a lessee does not have to treat a lease as a long funding lease (CAA01/S70H, BLM20120), there is no requirement for the lessee to know about, or be affected by, the lessor making an election. However, there may be circumstances where

  • a lease is potentially a long funding lease in the hands of the lessee (because it meets the basic definition of a long funding lease), but
  • the lease is not a long funding lease in the hands of the lessor.

In such circumstances, if the lessor makes an election it is not entitled to claim capital allowances. Therefore the condition in CAA01/S70Q that the lessor is not entitled to claim capital allowances is satisfied.

Thus, in exceptional cases, a lease which is potentially a long funding lease in the hands of the lessee could, if the lessor makes an election, become a long funding lease in the hands of the lessee (and assuming the lessee makes a return on that basis).

Is the asset plant or machinery?

The fact that a particular asset is plant or machinery in the hands of a lessor does not affect whether the asset is plant or machinery in the hands of the lessee.

Wherever a lessee claims that a lease is a long funding lease of plant or machinery the leased asset will need to meet the same tests to qualify for plant or machinery allowances as in any other case and the guidance at CA21010 onwards applies.