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HMRC internal manual

Business Leasing Manual

Taxation of long funding leases: long funding finance lessors: example of exceptional item


Most profits and losses under a finance lease pass through gross earnings. However some may not.

In the example in BLM40110 the lessee was due a net rental refund of £19,000. However, if the plant or machinery had only been worth £80,000 the lessee would have owed a net termination rental of £20,000. If that termination rental had not been paid the lessor would have suffered a commercial loss of £20,000. That loss might be passed through the profit and loss account, perhaps described as a bad debt.

In different circumstances, a lessor may seek an exceptional payment in return for agreeing to terminate a lease. That payment might give rise to an exceptional profit that may not be accounted for as gross earnings.

Both cases would be covered by CTA10/S361: the loss would be an allowable deduction and the exceptional receipt would be taxable as income.

Note that such items may already be allowable or taxable on general principles. Where this is the case, CTA10/S361 will not be in point because it only applies where a profit or loss would not otherwise be brought into account in computing profits.