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HMRC internal manual

Business Leasing Manual

Taxation of leases that are not long funding leases: finance lessees: pre-use rentals: tax treatment of non-finance charge element

Payments made prior to the time the asset comes into use may also include amounts in addition to the finance charge element, being the balance of the payments due under the lease (that is, the ‘loan’ repayment element).

Under GAAP these amounts will be set against the obligation outstanding (that is, they will be deducted from the outstanding ‘loan’ in the balance sheet). Under GAAP, the asset will not begin to be depreciated until it is brought into use and no depreciation should pass through the profit and loss account until that time (ie ‘commencement’ as defined for FRS102, IAS 17 and FRS101 - see BLM11030.

It follows that, for tax purposes no further deduction in respect of the lease rentals (over and above the finance charge element) should be given until the period of accounts in which the asset comes into use. The appropriate measure of the deduction, in addition to the finance charge element, due in that period will normally be the depreciation charge calculated in accordance with GAAP - see BLM32500 onwards

You should not accept that an asset has come into use before it is regarded as having done so in the commercial accounts, and so is depreciated. That is, as with the capital element of leases rentals payable after commencement, a deduction is only available as the asset is depreciated under GAAP.