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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 - capital argument

The argument that expenses incidental to the creation of a finance lease are capital relies on the legal form of the transaction (the hiring of an asset):

  • expenses incidental to a capital transaction are themselves capital (see for example, ECC Quarries, 51TC153; BIM35325);
  • the asset purchased by the lessor for finance leasing is clearly on capital account (illustrated by the capital allowances claim);
  • the granting of the finance lease is akin to the grant of a lease of real property and that is a capital transaction (see CIR v Wilson’s Executors (18TC465) - this case concerned whether expenses incidental to a real property lease were expenses of management within ICTA88/S25 but remarks by the Court of Session suggest that the judges viewed them as capital);
  • it is wrong to draw a distinction between real property leases and chattel leases (see Vinelott J’s remarks in RTZ v Elliss at pp 172-3 61 TC; BIM35420);
  • in view of the very limited value of the reversionary interest, a finance lease of a chattel is analogous to a long lease of land (the clearest example of a capital transaction in the real property field);
  • a finance lease amounts to the once and for all disposal of nearly all the economic rewards and risks of ownership of the asset and thus has if anything an even stronger capital flavour.