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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: leasing of fixtures: premature termination of lease

A further issue arises where the assets in question cease to be subject to the ‘deemed lease’ before the end of the useful economic life of the asset and in circumstances where a tax deduction has not yet been given for a significant amount of rentals already paid. Since, as a matter of general law, the lessee always owns the asset (see BLM34005) the lessee will actually keep the asset when the ‘deemed lease’ ends. In these circumstances giving a deduction in the year of termination for the unallowed rentals would be contrary to the intention behind Statement of Practice 3/91, which is to ensure that rentals are matched with the income the asset can be said to generate in accordance with the fundamental accounting concept of accruals.

In practice you should normally accept that the rentals should be allowed as revenue deductions over the full economic life of the fixtures concerned in the user’s hands, whether or not the fixture remains subject to the fixtures lease. The rate of depreciation of the asset in accounts drawn up under GAAP is likely to provide a means of ensuring an acceptable spread. This is because the lessee actually owns the asset as a matter of general law and so his depreciation provisions will be based on the true life of the asset and not on the length of the finance lease.

You should therefore look closely at arrangements in which the lessee claims that the rental payments should all be allowed over the primary period or, alternatively, that the balance of unallowed rentals should all be deducted when the lease ends. In substance, the lessee may be paying capital instalments which are not allowable in arriving at taxable profits. If you require further guidance, please let CTISA (CT&BIT) know.