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HMRC internal manual

Business Leasing Manual

From
HM Revenue & Customs
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Taxation of leases that are not long funding leases: tax advantages: examples comparing commercial profits of the parties, part 2 of 3

In Example 1 at BLM30040:

  • the bank’s commercial profit is the interest on its loan less its expenses, including the bank’s own interest costs in funding the loan it makes - £20 (£200 less £180); the loan and the loan repayments fall outside the profit and loss account.
  • the borrower’s commercial profit is arrived at after deducting the interest payable and the depreciation on the kit bought with the loan. At the end of the day the depreciation will be equal to the cost of the kit less the sale or scrap value (here the residual value is nil). So the borrower will show deductions in its commercial accounts of £1,200 (being £200 interest and £1,000 of depreciation).

In Example 2 at BLM30040:

  • the finance lessor’s commercial profit is measured in the same way as the bank’s commercial profit - it is the ‘interest’ return less expenses, so the finance lessor’s commercial profit is also £20; the capital repayment elements in the rentals fall outside the profit and loss account.
  • the finance lessee’s commercial profit is arrived at after deducting the ‘interest’ element in the rentals and the depreciation on the kit - which is the same as for the borrower, so the finance lessee’s deductions also amount to £1,200 (being £200 interest and £1,000 of depreciation).

None of this is surprising. The whole point of GAAP is to deal with a finance lease in much the same way as a loan transaction, which is what it is in economic and commercial substance.