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HMRC internal manual

Business Leasing Manual

Taxation of leases that are not long funding leases: finance lessors: general taxation issues: 'income-into-capital' schemes - finance lease or operating lease?

In the consolidated accounts of the lessee group these transactions are likely to be treated in accordance with their substance as a finance lease or secured loan. (The treatment is likely to be similar under UK GAAP and IFRS.) But the treatment in the accounts of the individual companies in the lessee group involved in the transaction will depend on who holds the option to purchase the lessor’s economic interest for a capital sum.

  • If the lessor granted the option to a company associated with the lessee, under GAAP the lessee would report that it has obligations under an operating lease - it is only in the group consolidated accounts that the substance of the transaction will be reported as a finance lease or a secured loan.
  • If the lessor granted the option to the lessee, the lessee should (in accordance with GAAP), report the transaction as a finance lease or secured loan and show the leased asset together with associated liabilities in its balance sheet.