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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: following the accounts: operating leases - general

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

  • the full rentals remain taxable but a deduction from profits is allowed to compensate for the lack of capital allowances. This deduction reflects the expected reduction in value of the asset (including additional capital expenditure), apportioned over the term of the lease on a straight line basis. In essence it is similar to depreciation,
  • any profits or losses arising to the lessor when the lease is terminated and the asset is sold are taxed or relieved when they arise. Profits or losses are calculated in accordance with the rules in ICTA88/S502G or ITTOIA05/S148F,
  • if an asset is used for a series of leases, the long funding lease rules assume that the asset is revalued to market value at the end of each lease.

Further guidance on the taxation of long funding operating leases is at BLM41000 (lessors) and BLM42040 (lessees).

Where a lessor writes a large number of operating leases the administrative burden of following the statutory calculation for each lease could be too high to make an election viable. However, using the appropriate accounting methodology would mean that the accounts are drawn up in a way that gives the result that would be achieved by following the strict statutory method.

In considering whether the figures in the accounts give the same result as the statutory methodology, there are three principal areas that need to be considered. These reflect the three issues mentioned above

  • depreciation policy BLM24320
  • profits and losses on disposal BLM24325
  • valuation policy BLM24330.

In considering whether the accounts give the same result as the statutory method it should be borne in mind that

  • the statutory method requires the use of some estimates, particularly concerning market value and residual value and therefore there is no absolute right answer for any one period. Over time, however, the total taxable profits should, inevitably, equal the commercial profits, just as is the case under the rules for taxing leases that are not long funding leases.
  • what matters is that the total taxable profits for the accounting period are correct but the profits from each lease do not have to be precisely the same as the statutory method.