HMRC internal manual

Business Leasing Manual

BLM30605 - Taxation of leases that are not long funding leases: passing on the benefits: who benefits from timing advantages?

In the early days of leasing the lessor could often keep the benefit of any tax advantage, but competition has gradually forced lessors to pass on the benefits to the lessee. This usually takes the form of reduced rentals but is sometimes reflected in the price paid to the lessee in a sale-and-leaseback deal (that is, the capital repayment element in the rentals might be less than the capital price paid to the lessee for the kit). Further guidance on sale and leaseback transactions is at BLM32500 onwards.

In small ticket leasing the tax timing benefit is very small compared with the margins charged. For example, the tax timing benefit might allow a reduction in the interest element of rentals of 0.5% (from, say, an implied rate of interest of 10% to 9.5%). Where a lessor has a cost of borrowing of (say) 5% it is moot as to whether the lessor can be said to be passing on any benefit to the lessee - or is just charging a margin of 4.5% rather than 5%.

In contrast, in big ticket deals the rate of interest implied in the lease may be reduced by 1.5% or more. This allows the lessor to offer sub-LIBOR borrowing to the lessee. For example, the lessor may borrow at 5% and lend (via a tax lease) at 4%. It is clear that the tax advantages are being passed to the lessee.

Lessors will not pass on all the value of the tax-timing advantage. The proportion passed on will depend on the strength of the lessee’s negotiating position. Where the lessee is in a strong position it might succeed in negotiating 80% - or even more - of the benefit.