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HMRC internal manual

Business Leasing Manual

Taxation of leases that are not long funding leases: sale and leaseback: introduction

Just as a finance lease may be a convenient (and tax efficient) means of financing the initial purchase of plant or machinery assets for use in a business, so existing plant or machinery may be sold to a finance lessor and then leased back (without ever leaving the factory floor) in order to refinance existing borrowing or to obtain general business finance. Because the user sells the legal title in the assets to the finance lessor, the lessor may claim capital allowances, the benefit of which filters through to the lessee in the form of more favourable rental terms.

It is important to remember that there are two legs to the transaction: the sale and the leaseback. Most consideration tends to focus on the lease-back aspect. But the first leg of the transaction involves the finance lessee disposing of an asset, and the treatment of the disposal proceeds should not be overlooked.

It is also important to bear in mind that the economic purpose of a sale and finance lease-back transaction is for the trader (the lessee) to borrow money. If the borrowed money is used for trading purposes, no difficulties arise. But if what is effectively borrowed money is used for other purposes, or if the effects of the borrowing arrangements are largely circular (so that, broadly speaking, the funds end up back in the lender’s hands) the only effect of which is to give the lessor capital allowances, such cases should be examined closely - see BLM35060.