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HMRC internal manual

Business Leasing Manual

Defining long funding leases: election: following the accounts: operating leases - valuation policy

If the asset is not sold when the lease is terminated the rules in CTA10/S369 (or ITTOIA05/S148F) ensure that a lessor is taxed on profits made over the term of the lease by using the concept of the termination value (CAA01/S70YH). In essence, where the plant or machinery is not sold, a notional profit or loss is brought into account as if the asset had been sold for market value.

Where a lessor leases an asset under a succession of leases and intends to base its return on figures in the accounts it should normally ensure that its accounting policy delivers essentially the same results as the statute. In considering whether a lessor’s accounting policy reflects the statutory method remember that

  • it is the overall total that matters, not the figure for each individual leased asset
  • the value of the asset is its unencumbered market value, not the value which a lessor might attribute to it on the basis of future lease rentals.

The taxing of all profits over the life of the lease, taking account of the amount the asset has actually depreciated, is a key concept under the long funding lease rules and cannot be ignored.

It is, however, recognised that this requirement may cause difficulty where the lessor does not routinely re-value assets at the end of a lease and, for some reason, it is not necessary to reflect the asset’s true market value in its accounts. It may be possible to agree to make a suitable adjustment to the accounts figures based on an assumed re-valuation. However that will mean that a profit is taxed for which there will be no depreciation in the accounts and future adjustments would be necessary. This may be impractical from the lessor’s perspective, but you should consider carefully any proposal to base taxable profits on the figures in the accounts.

You should refer cases of doubt or difficulty to CTISA (CT&BIT) for advice.