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HMRC internal manual

Business Leasing Manual

Taxation of leases that are not long funding leases: finance lessees: taxation generally: following generally accepted accounting practice

Where the lessee has accounted for a lease in accordance with GAAP the finance charge element of the rentals allocated to a period of account is deductible in computing the taxable profits of that period.

There are a number of acceptable methods of allocating the total finance charge (‘interest’) element of rentals to each period of account for the purposes of GAAP (BLM15040). You should normally accept any method used in the accounts which allocates finance charges in such a way as to give a constant return to the lessor on the total rentals outstanding. You should also accept the use of a straight-line allocation of the finance charges where this method has been used in accordance with the Financial Reporting Standard for Smaller Enterprises (FRSSE).

In determining what proportion of the capital repayment element should be allowed for tax purposes in a period of account, you should normally accept that the properly computed commercial depreciation of the asset which is charged to the profit and loss account in that period represents the appropriate amount. There is an exception to this rule in the case of a sale and finance leaseback, see BLM35025.

Where GAAP has been correctly applied in a finance lessee’s accounts no adjustments will normally be necessary in the tax computation to give a deduction, in the appropriate periods, for total rentals payable net of rebates (but see the example on sale and lease-back at BLM35030). That is, correctly prepared accounts normally give the right answer for tax purposes without further action in the tax computation.

Where, however, the depreciation charge is not calculated in accordance with GAAP, then it will not represent the appropriate proportion of the capital repayment element of the rental. In such cases you should only allow such part of the rentals for the period as would represent depreciation had it been calculated in accordance with GAAP. Further guidance is at BLM32500.

In some cases the asset is not depreciated. See BLM32700.