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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: asset not depreciated: regulatory requirement

In some exceptional circumstances (for example in the water industry) regulatory factors may have led to a situation where the rights in specific categories of leased assets have not been depreciated in the lessee’s statutory accounts prepared under UK GAAP (those assets that fall within paras 97-99 of FRS 15 (Renewals accounting)) although it is recognised that the benefit of the assets are being consumed over a long period. In those circumstances - and in those circumstances only - you should accept that the allocation of the rentals to periods of account may be by reference to the depreciation which would reasonably have been charged had this accounting treatment not been adopted.

This situation should not arise where the statutory accounts are prepared under IFRS as this accounting treatment is not permitted under IFRS.

This situation also should not arise in UK GAAP entities that adopt FRS101 or FRS102, which do not permit this accounting treatment.

Otherwise, if depreciation of a finance leased asset is not recognised in the lessee’s commercial accounts no deduction for it (representing the ‘capital’ element in the lessee’s rentals) is allowable for tax purposes either.