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HMRC internal manual

Business Leasing Manual

HM Revenue & Customs
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Taxation of leases that are not long funding leases: tax advantages: introduction

When SSAP 21 accounting treatment was introduced in 1984 the Government decided at that time not to follow the same ‘substance-over-form’ approach for tax purposes. The tax system continued to regard a finance lease as the hire of an asset and not as a loan. This remained the case until FA 2006 which introduced the concept of long funding leases and which follows a substance over form approach. See the guidance at BLM20000 onwards for identifying a long funding lease and BLM40000 onwards for guidance on taxing a long funding lease.

However, until FA 2006

  • rentals are wholly revenue items – no part is regarded as the repayment of a loan
  • rental rebates are wholly revenue items, see BLM32060
  • whatever plant or machinery capital allowances are due go to the lessor as legal owner of the asset, unless the lease falls within the terms of CAA01/S67, in which case the allowances generally go the lessee, see CA23300
  • industrial buildings allowance goes to the holder of the `relevant interest’, see CA33000
  • finance lessees get no capital allowances but continue to get relief for the gross rentals which, in total, equal the capital cost of the plant or machinery (the ‘loan’) and the ‘interest’ on the ‘loan’.

The same is true where the lease is an operating lease and tax advantages can arise from operating leases in much the same way as they do for finance leases, see BLM31200.

Basic guidance on the tax treatment of leases that are not long funding leases is at BLM00300 onwards. Further guidance on finance lessees is at BLM32000 onwards and on finance lessors is at BLM33000 onwards.