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HMRC internal manual

Business Leasing Manual

Defining long funding leases: election: following the accounts: finance leases

In outline, under the rules for taxing long funding finance leases

  • the amount to be included in the lessor’s taxable income from a lease (i.e. as ‘rental earnings’), for a period of account, is the gross return on the investment calculated in accordance with GAAP
  • profits or losses that arise in connection with a lease, whether they are income or capital in nature, and which are recognised as profits or losses for accounting purposes, are treated as taxable income or an allowable expense
  • termination payments paid to the lessee when the lease terminates (often referred to as a rebate of rentals) are not a deduction in computing tax profits, although this amount may be included in the computation of rental earnings.

For leases that are accounted for as finance leases the tax treatment for long funding leases reflects the accounting treatment. In other words, for finance leasing transactions only, the correct result for tax will be based on the figures in the accounts.