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HMRC internal manual

Business Leasing Manual

HM Revenue & Customs
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Taxation of leases that are not long funding leases: finance lessors: reinvestment income: interest earned where loan relationship legislation does not apply

For periods to which the loan relationships legislation does not apply (periods falling before 31 March 1996, or where exceptionally the lessor is not within the charge to corporation tax), the interest should be regarded as:

  • a trading receipt (in accordance with the guidance in BIM40805 so long as it is not received under deduction of UK income tax; and
  • within the charge to tax under Schedule D Cases III to V, as appropriate, if it is received under deduction of income tax.

The issue which arises for tax purposes is whether any interest income recognised in the accounts in these circumstances should be taken into account as a trading receipt or taxed under another case of Schedule D. Treatment as a trading receipt (rather than under the appropriate head of charge for investment income) may lead to significantly earlier recognition. This may be the case where the lessor allocates earnings to accounting periods in accordance with the ‘actuarial method’. In these circumstances the interest may well be recognised in the accounts some considerable time before it accrues.