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HMRC internal manual

Business Leasing Manual

Taxation of leases that are not long funding leases: finance lessors: reinvestment income: introduction

Because a finance lease is in substance a lending transaction, the lessor will normally have to fund or finance in some way its investment in the finance lease. There may be times, typically late in the primary period of a lease, when

  • the inward cash flow so far generated from the lease (principally consisting of the rentals, tax repayments or receipts for the surrender of group relief, and sometimes government grants),

may exceed

  • the outward cash flow in respect of the lease (principally consisting of the cost of the leased asset, and interest on the borrowings used to fund that purchase and tax payments).

In these circumstances interest may be earned from the investment of these surplus cash balances.