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HMRC internal manual

Business Leasing Manual

Defining long funding leases: miscellaneous definitions: term of a lease: meaning of 'non-cancellable'

A period is non-cancellable if it can be cancelled only

  • on the occurrence of a remote contingency, or
  • on payment of a sum that, at the inception of the lease is unlikely to be paid, with the result that continuation of the lease is reasonably certain.

The shorter the term of a lease, the less likely it is to be a long funding lease. Therefore it is possible that lessors will seek to argue that part of the period for which the plant or machinery may be leased is cancellable when, in fact, it is reasonably certain to continue.

This test is based on, but is not ultimately determined by, accounting standards and so, if you are concerned about the term of the lease, in the first place seek advice form your local advisory accountant to establish the accountancy view. If that still seems too short then it may be possible to argue for a longer lease term.

The point here is that the statutory test does not refer to the term of the lease as established under GAAP, and it may be possible to argue that, although the lease term is relatively short under GAAP, it is longer for tax purposes. Therefore if, having sought accounting advice, you are still concerned you should seek advice from CTIS (CT&BIT) before taking the matter further.


Fred & Co lease a printing press for 10 years from Lessor Plc. The first three years of the lease cannot be cancelled for any reason. The final seven years can be cancelled on payment of £6,000 before the end of year 3. Fred & Co would not be guaranteed any rebate if the printing press were sold by Lessor Plc. The present value of the rentals for the last seven years of the lease is around £6,000. Fred & Co has to pay roughly the same amount whether the press is leased or not. Fred & Co is unlikely to pay £6,000 to cancel the lease as it would make more commercial sense to continue to pay the lease rentals and enjoy the use of the press.