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HMRC internal manual

Business Leasing Manual

Taxation of leases that are not long funding leases: tax advantages: timing advantages

It is important to appreciate how tax affects the choice between leasing and ordinary borrowing. Broadly, the capital allowances due to a lessor should only make a difference to the timing of the lessor’s tax liability as compared to the tax liability of an equivalent lender. The capital allowances should not normally represent a gross amount of extra relief. But the legitimate timing gains which can arise because of leasing may be very valuable.

Broadly speaking, there should be no material overall difference between the commercial and tax profits of a lessor and a lessee on the one hand and a lender and borrower on the other hand. The basic explanation of the reasons for this are set out in BLM00700 onwards. However, the issues are more complex than the basic explanations suggest. This is for two main reasons:

  • first, the timing issues are subtle: see BLM30200 onwards.
  • second, lessors have found ways to maximise taxation gains that were never intended.

Guidance on ways in which lessors have sought to turn the tax timing advantage into an absolute advantage, and on counter measures introduced, is at

BLM70000 onwards – income into capital schemes. and

BLM80000 onwards – sale of lessor companies and similar arrangements.