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HMRC internal manual

Business Leasing Manual

Taxation of leases that are not long funding leases: finance lessors: reinvestment income: interest earned on cash balances

Typically, competitive pressures will compel the lessor to take interest earned from the investment of these surplus cash balances into account in setting lease rentals. In those circumstances, where the lessor applies SSAP21, paragraph 97 of the guidance note to SSAP 21 permits those sums to be taken into account in calculating the lessor’s constant rate of return on the balances outstanding under the lease as they are an integral part of the operations of what is in essence a financial concern.

FRS101, FRS102 and IFRS do not include any specific guidance about the treatment of interest earned from the investment of surplus cash balances.

You should resist any contention that for the purposes of computing trading income the accounting treatment of the interest is over-ridden by a tax principle. The general background on the timing of trading receipts is described in BIM31080 onwards. For guidance on whether such interest is chargeable as trading income see BLM33115 (for periods ending after 31 March 1996) and BLM33120 (for other periods and where loan relationship legislation does not apply).