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HMRC internal manual

Business Leasing Manual

HM Revenue & Customs
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Taxation of leases that are not long funding leases: finance lessees: importance of lease term: no secondary period: no rental rebate

It is possible that a lessor or lessee in the same group, or who are otherwise connected, might enter into a wholly uncommercial deal which leaves the lessee with neither a secondary period nor a rental rebate, even though the asset is expected to have a high value at the end of the lease term.

The parties just do nothing when the lease ends - the lessee just carries on using the asset and the lessor does nothing. In these circumstances it may be possible to infer a secondary period, see BLM32550. Alternatively, the lessor may repossess the asset and sell it, retaining all the proceeds.

It may not, of course, matter much for tax purposes. A UK resident lessor group member should also be taxed over the primary period and there may be nothing in it for the group as a whole: the figures are self cancelling. But this may not be the case if the lessor is resident abroad in a jurisdiction which permits the deferral of income or if the lessor is resident in a tax haven or is tax exempt. Clearly, such an arrangement also might mean the value of the asset at the end of the lease term would escape taxation.

Cases of this nature in which the lessor is resident abroad are likely to involve attempts at avoiding tax and will require detailed factual investigation as it may be that for tax purposes

  • the lessee’s depreciation charge may still be written off over the life of the asset if that is determined to be the correct accounting treatment, for example applying FRS 5 for UK GAAP might require the lessee to recognise the substance, namely that there is an implicit agreement or understanding that the lessee will keep the asset for life and should depreciate it accordingly,
  • in reality, from the lessee’s perspective, the lease may be no more than an operating lease with excessive rentals, or
  • there should be a deemed rental rebate at the end of the lease term.

Please let CTISA (CT&BIT) see any cases where it is claimed that

  • the lessee obtains accelerated relief for rentals on the grounds that there are no secondary periods, and
  • the lessee is not entitled to a rent rebate,

once you have established the facts, but before entering into detailed arguments.