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HMRC internal manual

Business Leasing Manual

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HM Revenue & Customs
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Taxation of leases that are not long funding leases: sale and leaseback: sale and finance leasebacks - tax adjustments

Where the second method under SSAP 21 is followed the adjustments required for tax purposes are as follows:

  • For the purpose of computing the lessee’s rental deductions, the sale and lease-back of the asset is recognised. That is, there is a new finance lease and the rental payments are, in principle, allowable for tax purposes in the same way as for any other finance lease. But the actual depreciation charge in the accounts will reflect the old book value of the asset and so the accounts alone do not provide the right answer. The appropriate deduction for the capital element of the lease rentals will be an amount equal to the depreciation which would have been debited in the profit and loss account had the asset been shown in the balance sheet at the value for which it was sold. The rate of depreciation actually applied to the asset in the accounts will normally indicate the rate to be applied to the asset in this computation.
  • The profit on the sale of the asset is again a capital profit. This profit will not have been taken to the profit and loss account so no tax adjustment will be needed.
  • There will be the usual capital allowances disposal value to be brought into account on the sale of the asset.
  • Where the asset is sold for more than its original cost there may also be a capital gains charge on the profit on the sale of the asset. Whether there is an actual charge will, of course, depend on the reliefs available to the seller, see also BLM35045).
  • The finance lessor cannot have first-year allowance, or annual investment allowance, (if, exceptionally, any is otherwise available) and his writing-down allowances will be restricted to a maximum of the original cost of the asset to the seller; that is, the cost to the lessee who has now leased the asset back (CAA01/S217 and S218, see BLM35055).
  • The deduction for the finance lessee’s rentals will be restricted under CAA01/S228B if the disposal value was restricted under CAA01/S222, see CA28550. This treatment applies only to sale and finance leasebacks before 9 October 2007. For such transactions on or after that date see BLM35026.

The examples at BLM35030 are relevant for transactions before 9 October 2007. After this date, sale and leaseback transactions are removed from being short leases and therefore are normally taken within the long funding lease rules (see BLM35026).

Sale and finance leasebacks entered into before 9 October 2007 - for income tax and corporation tax chargeable in relation to periods that end after 16 March 2004

FA 2004 introduced S228A to S228J of CAA 2001. This was anti-avoidance legislation aimed at certain tax avoidance schemes that enabled taxpayers to gain uncommercial benefits from sale and finance leaseback transactions. The schemes operated by bringing a restricted disposal value into account for the seller on the grant of a sale and finance leaseback (S222), but then allowing the seller to claim further deductions in the form of lease rentals, giving them a net deduction beyond the economic cost of the asset. The main operative section to combat this avoidance was S228B, which acted by restricting the amounts deductable in respect of lease rental payments made under a leaseback.