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HMRC internal manual

Business Leasing Manual

Taxation of leases that are not long funding leases: How tax advantages arise: timing differences, part 1 of 4

Even where the overall net tax and commercial profits are the same there can still be valuable timing differences. The key timing point is shown by the examples in BLM30040:

  • The banker’s and lessor’s commercial profits (the ‘interest’ earnings) will both tend to be spread over the five year loan period or finance lease primary period in proportion to the outstanding debt. That is, the largest earnings will arise in the first year and the profit will decline over the primary period as the debt is repaid. This is also true of the banker’s tax profit.
  • However, the finance lessor who is entitled to capital allowances on the full cost of the kit will tend to have tax losses upfront and larger tax profits later, even though it should be chargeable on the same net profit by the end of the day.