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HMRC internal manual

Business Leasing Manual

Taxation of leases that are not long funding leases: passing on the benefits: rental profile - effect of CTA10/Part 21 and ITA07/Part11A

Finance lessors can offer any desired rental profile. However, the provisions of Part 21 CTA 2010 / Part 11A ITA 2007 (see BLM70000 onwards) have made the calculations more complex and require sophisticated computer programs. This is because Part 21 / Part 11A makes the minimum taxable earnings equal to the accountancy earnings in order to counteract leasing arrangements which defer or avoid tax.

There is therefore an iterative process between the computation of the rental the lessor needs to charge and the computation of the accountancy earnings. If the rental goes up the accounts earnings will go up and so will the tax charge; that increased tax charge then has to be fed back into the rental computation which, in turn, feeds back into the accountancy earnings; and so on. Normally the iterative process will converge on an appropriate level of rentals or, at least, one that is sufficiently close for practical purposes.