beta This part of GOV.UK is being rebuilt – find out what beta means

HMRC internal manual

Business Leasing Manual

Taxation of leases that are not long funding leases: How tax advantages arise: ‘loan' outstanding will vary because of capital allowances

One issue ignored earlier is that timing differences created by tax will usually alter the lessor or lender’s own borrowing costs. And, because tax timing benefits are usually passed on, wholly or partly, to the lessee or borrower, the commercial and taxable profits of the lessor or borrower may change.


  • A lessor buys kit costing £1m and qualifies for a 25% writing down allowance.
  • The corporation tax rate for the lessor is 30%.

The lessor will have to spend £1m when it buys the kit so it needs to borrow £1m at the outset on which it pays 5% interest. If the kit is bought on the last day of the tax year, the lessor will get the cash benefit of the 25% writing down allowances (£75,000) nine months later. Ignoring other expenses and receipts, after nine months the lessor’s borrowings will reduce by £75,000, in addition to any reduction as a result of the ‘capital’ element in the lease rentals received by that time.

The actual reduction in the lessor’s borrowings will obviously depend on the pattern of rental receipts and outgoings. But, in principle, the lessor’s own interest costs will reduce at the nine month point as the lessor can use the value of the tax relief to pay off a similar amount of its own borrowings. Alternatively it can retain and invest the value of the tax benefit, if necessary by charging fellow group companies if the losses have been surrendered as group relief.