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HMRC internal manual

Business Leasing Manual

Taxation of leases that are not long funding leases: finance lessees: general issues: depreciation methods - lines of enquiry

The first line of enquiry is to find out the facts. For example, ask the taxpayer to explain the depreciation policy and the evidence it is based on; can the taxpayer provide some independent source of evidence; what do the manufacturers of the asset give as the useful economic life?

In the case of a company which is a member of a group, it might be relevant to consider whether the depreciation rates shown in the consolidated accounts match those shown in the subsidiary’s accounts used for tax purposes; what have the notes to the accounts said over the past few years; are there any discrepancies between the treatment of leased assets and those owned outright?

In appropriate cases it is sometimes worth considering whether the depreciation rate is appropriate, and one factor that may be relevant is to consider the past track record. If, for example, an asset has been depreciated to 10% of its original cost, but is then sold for 50%, this might suggest that the depreciation policy is excessively prudent. A consistent track record of assets being sold for a book profit might be grounds for questioning the depreciation policy. Since this is essentially a matter of applying the prevailing accountancy practice, you should seek advice from your advisory accountant.