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HMRC internal manual

Business Leasing Manual

Defining long funding leases: miscellaneous definitions: term of a lease: 'reasonably certain': introduction

The term ‘reasonably certain’ takes its natural meaning. The following simple examples illustrate the approach you should take.

These examples assume very simple facts. If there are side letters or other material facts then the consequences could be different. As always, it is essential that you fully establish the facts.

These facts will include

  • the lease itself,
  • the nature of the asset, particularly whether it is unique or has been modified/constructed with a specific use in mind,
  • whether there are side letters or other agreements that may have a bearing on the exercise of the option,
  • it will also be necessary to look at the nature of the business,
  • what is the likelihood that the lessor would be able to sell or re-lease the asset if the lessee were not to exercise the option to extend the leaser?
  • Could the lessee carry on its business, or that part of its business for which the asset is used, without extending the lease term?

Note the anti-avoidance rule at BLM25145 which may apply to reverse the ‘reasonably certain’ test where the asset is expected to have a high value after 5 years.

CTIS (CT&BIT) have given an assurance to the leasing industry that, to ensure consistency of approach by HMRC, in the event of an enquiry involving consideration of the lease term you should establish all the facts and seek advice from CTIS (CT&BIT) before taking a formal view on whether an option is reasonably certain to be exercised.

There is no need to refer to CTIS (CT&BIT) if the position is clear and you agree with the taxpayer’s view, but if you have any doubts you should always make a referral.