Taxation of long funding leases: long funding operating lessors: introduction
The basic rules for taxing lessors under long funding operating leases are set out in CTA10/S363-365. Anti avoidance provisions were introduced from 9 October 2007, which limit the application of S363-365 in certain situations (see BLM41060 and BLM41065)
Where plant or machinery is leased out under a long funding operating lease then, to reflect the absence of capital allowances, the lessor’s income is reduced by an amount that is established at commencement.
The deduction is the amount by which the asset is expected to fall in value over the term of the lease, apportioned on a time basis to each period of account over the term of the lease. The deduction for each period is referred to as the ‘periodic deduction’.
The periodic deduction is based on
- the ‘starting value’ (often cost, but see BLM41010), less
- the amount, which at the commencement of the term of the lease, is expected to be the residual value of the plant or machinery.
The expected residual value is the estimated market value of the plant or machinery if it were disposed of at the end of the lease, less the estimated costs of disposal (CTA10/S381(4))).
The resulting value is referred to as the gross reduction over the term of the lease and this is apportioned on a time basis over that period.
See BLM41015 for an example.
CTA10 applies for corporation tax purposes for accounting periods ending on or after 1 April 2010. Prior to this date the legislation was at ICTA88/S502E.
Accounting periods ending before 1 April 2010
The restriction at ICTA88/S502E applied in the same way as that in CTA10 but the calculation was slightly different. The periodic deduction was instead based on
- the ‘relevant value’ (ICTA88/S502E(4)), less
- the expected ‘residual value’ as defined at ICTA88/S502L(2).
As in CTA10 the resulting value is referred to as the gross reduction over the term of the lease, and this is apportioned on a time basis over that period.