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HMRC internal manual

Business Leasing Manual

Taxation of leases that are not long funding leases: finance lessees: termination adjustments: example

This example shows the computational adjustments needed on termination where GAAP has not been applied in preparing the lessee’s accounts (see BLM32335). The facts are that

  • an asset cost £10,000,
  • its estimated useful life is 6 years,
  • the finance lease rentals are £4,000 pa in arrear over a primary period of 3 years and nominal thereafter,
  • the asset is sold at end of year 4 for £5,000 and proceeds paid to lessee as rental rebate,
  • accounting treatment of rentals: SSAP 21 not followed; rentals charged against profits of the primary period at £4,000 pa,
  • accounting treatment of rebate: rental rebate of £5,000 credited in year 4,
  • tax treatment of rentals: it has been agreed that rentals are spread evenly over useful life of asset (6 years), so the trader is given deductions of £2,000 a year for each of the three years by the time the asset is sold.

The tax treatment of the rebate of £5,000 in the example above differs from the accountancy treatment. Instead of treating the rebate of £5,000 as a taxable receipt, a further deduction for rentals of £1,000 is due calculated as follows:

Rentals paid: 3 x £4,000 = £12,000
Rebate:  £(5,000)
Net outgoing £7,000
Tax deductions given so far: 3 x £2,000 = £6,000
Further deduction due is  £1,000
To give total deductions of £7,000