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HMRC internal manual

Business Leasing Manual

Taxation of leases that are not long funding leases: legal expenses: incidental to creation of lease - revenue argument

There are two different arguments for regarding expenses incidental to the creation of the lease itself as revenue expenditure. The simpler, and more radical, of the two arguments for regarding the expense as revenue takes this ‘economic substance’ approach at face value would be that

  • a finance leasing business is in substance, if not in form, a type of banking business involving the making of loans secured on particular assets - see the accounting treatment,
  • the incidental expenses incurred by a bank in making such loans are revenue,
  • Another way of putting much the same point, but having more regard to the legal form of the transactions, would be that,
  • the incidental expenses of entering into a lease need to be distinguished from the expenses of acquiring the leased asset,
  • the fact that such expenses would be capital in the hands of the lessee where the lease is a means of providing fixed assets of his business is irrelevant,
  • finance leases, from the lessor’s point of view, are agreements which directly generates income (contrast the lessee’s position) - they are ‘disposal’ rather than ‘profit-making structure’ agreements in the terminology used in such cases as John Mills Production Ltd v Mathias (see pages 454/5 of 44 TC),
  • the negotiation of such agreements is an ordinary incident in the income generation process (in the same way as a bank makes loans).