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HMRC internal manual

Business Leasing Manual

Taxation of long funding leases: long funding finance lessors: rental earnings

Lessors of plant or machinery under long funding finance leases are taxed on the rental earnings that are shown in the accounts, or which would be shown if accounts were prepared in accordance with GAAP (CTA10/S360). These rental earnings may be described as finance income or finance lease receivables.

The rental earnings of CTA10/S360 includes the gross earnings (‘finance charges’) referred to at BLM14000 onwards but may include other items such as the small profit retained on selling the asset when a lease comes to an end. See BLM40110 for an example.

Where, exceptionally, a lease is accounted for as a loan the lessor is taxed on the amount that is, or should be, shown as interest in accounts prepared under GAAP (CTA10/S360(4)). Note that although the income is accounted for as interest it does not arise from a loan relationship and so the loan relationships legislation does not apply.

This guidance refers only to CTA10, but essentially the same principles apply to the equivalent sections in ITTOIA/05. The equivalent sections are

  • CTA10/S360 = ITTOIA05/S148A
  • CTA10/S361 = ITTOIA05/S148B
  • CTA10/S362 = ITTOIA05/S148C
  • CTA10/S363 = ITTOIA05/S148D
  • CTA10/Ss366-8 = ITTOIA05/S148E
  • CTA10/S370 = ITTOIA05/S148F