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HMRC internal manual

Business Leasing Manual

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

Where GAAP has been correctly applied in a finance lessee’s accounts no adjustments should normally be necessary in the tax computation to give a deduction in the appropriate periods and in accordance with the accruals concept for total rentals payable net of rebates. An exception to this general rule is where there has been a sale and finance leaseback and the asset has been sold for a value different from the carrying value in the balance sheet.

The obvious compliance issue that arises is whether correct accountancy principles have been applied or whether, in an attempt to accelerate tax relief, the deductions for depreciation or the ‘interest’ element of the rentals have been incorrectly front-loaded, see BLM32050.

The charge for depreciation of the leased asset must not be added back in the lessee’s tax computation nor must the lessee’s profit or loss on sale of the leased asset be adjusted in the tax computation.

The total of the depreciation charged in respect of the leased asset, adjusted for any profit or loss on sale, is equal to the total rentals paid less the finance charge element (charged against profits separately) and adjusted for rebates (or sometimes additional rental payments) on termination of the lease. See BLM32300 onwards regarding termination adjustments generally.

As the depreciation charge also measures the rate at which the value the business extracts from the leased asset is used up, the result is to give a tax deduction consistent with the accruals concept.