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HMRC internal manual

Business Leasing Manual

Taxation of long funding leases: long funding finance lessors: termination

Where a finance lease of plant or machinery comes to an end the plant or machinery is usually sold. The lessor usually passes the majority of the sale proceeds in excess of the residual value to the lessee in the form of a rebate of rentals. As the lessor is taxed only on the rental earnings in accordance with CTA10/S360 (rather than on the full amount of the rentals receivable), no deduction in respect of this payment to the lessee is appropriate.

CTA10/S362 ensures that this is the case by providing that the lessor is not allowed a deduction in computing its profits

  • where a lease terminates (for whatever reason), and
  • a sum is calculated by reference to the termination value is paid to the lessee

Looking at the example in BLM40110 the lessor is obliged to refund rentals of £19,000 to the lessee. CTA10/S362 ensures that no deduction is available as none is needed to ensure the lessor is taxed on the commercial profits

In one sense it may be argued that the lessor has enjoyed a deduction in computing it profits because it is reflected in gross earnings. CTA10/S362 does not prevent such a deduction (see CTA10/S362(3)).