Taxation of leases that are not long funding leases: leasing of fixtures: termination of leases
It may be necessary to analyse the ‘lump sum’ payable by the lessee to the lessor between an adjustment to past revenue outgoings (which would itself be revenue) and the balance consisting of the ‘capital sum’ dealt with under the capital allowances code where:
- leased plant or machinery takes the form of fixtures in a building,
- the circumstances are those set out in CAA01/S177 (equipment lessors), see CA26200,
- an election is made to ensure that the lessor obtains capital allowances (even though under general law he has no title to the asset),
- the user negotiates his release from the agreement by the payment of a lump sum,
- CAA01/S192 treats the plant or machinery fixture as ceasing to belong to the lessor and CAA01/S195 treats the fixture as belonging to the lessee, see CA26700 onwards,
- CAA01/S196 treats any ‘capital sum’ paid by the lessee to the lessor as being the price obtained by the lessor for the sale of the fixture and CAA01/S195 treats the same ‘capital sum’ as being the expenditure incurred by the lessee on the provision of the fixture).
How the lump sum should be analysed into its various components is a question of fact. In practice, however, you should normally accept that the ‘capital sum’ attributable to the plant or machinery fixture is equal to the smaller of the book value of that asset in the lessee’s hands immediately prior to the termination of the lease or the ‘lump sum’ paid on the termination, provided that
- both lessee and lessor agree to adopt the same basis, and
- the fixture has been depreciated by the lessee prior to the transaction in accordance with correct accountancy principles.
Any balance of the lump sum (after deducting the capital element calculated in this way) is a revenue outgoing deductible in the period in which the termination takes place to the extent not reflected in deductions for earlier periods.