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HMRC internal manual

Business Leasing Manual

Taxation of leases that are not long funding leases: finance lessees: taxation generally: introduction

This part of the manual only deals with payments of rent (including rent rebates received on termination). In particular it does not consider incidental costs concerned with leasing transactions (often capital - see BLM32040) or costs concerned with the modification of the leased asset.

It also only deals with leases that are not long funding leases.

The principal issue concerning the treatment of a finance lessee (other than a lessee under a long funding lease (‘LFL’) - see BLM40000) is the timing of the tax deduction for rentals.

As explained at BLM15000 onwards, GAAP requires a finance lessee to treat lease rentals as if they contained ‘interest’ and ‘capital’ elements and show in its profit and loss account

  • the ‘interest’ element of lease rentals, and
  • depreciation of the leased asset over the shorter of the lease term and the asset’s expected useful life, taking onto account the expected value of the asset at the end of the lease term.

Over time, the total of the ‘interest’ and depreciation should equal the rentals paid net of any refund of rentals receivable on termination.

Although GAAP requires a proportion of the rentals payable to be treated as if it were the repayment of a loan, in law the rentals remain revenue payments for the use of the asset, and for tax purposes the whole of the rentals should be allocated to the periods of account for which the asset is leased in accordance with the accruals concept, see BLM32210