Taxation of leases that are not long funding leases: finance lessors: general taxation issues: finance lessors - detail
For the tax treatment of the ‘interest’ element in the rentals, the aim is to follow the accountancy. As in other situations, the accountancy often provides a ready-made measure of the income for tax purposes - however, in this case, accountancy only provides a measure of part of a finance lessor’s income.
For the tax treatment of the ‘capital’ element in the rentals, there is no accountancy model which can be followed. Unless the lease is a long funding lease the capital element in the rentals is income for tax purposes, but for accountancy purposes it is loan repayment and a balance sheet item.
The ‘capital’ element of the rentals is taxed following ordinary accruals principles. Normally, earnings are recognised in the period for which they are payable (as contrasted with the period in which they are payable or paid). For example, if
- a company has a 31 December year end,
- rent under a lease is paid annually in advance, and
- the capital element of rent payable on 1 December 2008 for the twelve months to 30 November 2009 is £1,200,
- £100 would relate to the year to 31 December 2008,
- £1,100 would relate to the year ended 31 December 2009.
You should also be aware of the rules in Part 21 CTA 2010 (formerly FA97/SCH12). These are covered in detail at BLM70000 onwards and counter two types of scheme:
- arrangements that turn what would normally be the lessor’s rental income into a capital gain. Part 21 counters these arrangements by taxing what would otherwise be capital as income.
- arrangements that defer the recognition of income for tax purposes, thus producing a mismatch between the commercial accounts earnings and the tax earnings. This deferral is achieved by having very low rentals payable in the early years of a lease so that the rentals receivable in respect of a particular period are less than the accountancy measure of earnings. Part 21 ensures that the taxable earnings are no less than the accountancy measure of earnings.
In addition there are rules that in some circumstances restrict the taxable element of a finance lessor’s income in the case of a sale and finance leaseback and lease and finance leaseback, see CA28000 and CA28900 onwards.