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HMRC internal manual

Business Leasing Manual

Taxation of leases that are not long funding leases: passing on the benefits: where lessee is not liable to tax - general

The timing benefits of leasing are particularly apparent where the asset-user is not liable to tax, either because of an exemption (as with Government Departments or Local Authorities), because of other reliefs (such as accumulated losses), or because they are outside the UK tax net. The finance lessor can take advantage of the capital allowances and feed the benefit through to the lessee in the form of lower rentals but there is no way in which the lessee could utilise the allowances.

In principle, the fact that the lessee is not liable to tax should still make no overall difference to the taxable profits. The lessee is outside the tax net so leasing doesn’t change its tax position. If the lessee takes a loan to fund an asset the bank will be liable to tax only on the interest earnings. In the case of a finance lease, the lessor should be liable on the gross rentals (capital plus interest) less the capital allowances. If capital allowances are due on the full capital cost, the net amount taxable is again the interest.