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HMRC internal manual

Business Leasing Manual

Taxation of leases that are not long funding leases: sale and leaseback: accounting as a refinancing exercise

The second method under SSAP 21 regards the transaction purely as a refinancing exercise. In substance, the asset is not treated as if it had been sold and the profit on sale is not regarded as profit. The asset stays in the vendor’s balance sheet at its book value and the sale proceeds should be shown as a finance lease liability. Where this treatment is adopted and the asset remains in the balance sheet at book value more far-reaching tax adjustments are required: these adjustments recognise

  • the sale of the asset
  • the fact that the depreciation of the asset does not match the total of the capital elements of the lease rentals. For example, if the asset is in the balance sheet at £1m but is sold for its market value of £1.1m the ‘capital‘ element in the lease rentals is £1.1m but following depreciation would only relieve £1m.

Further guidance is at BLM35025 to BLM35055.