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HMRC internal manual

Business Leasing Manual

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HM Revenue & Customs
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Taxation of long funding leases: long funding operating lessors: 'Starting value'

The starting point for calculating the periodic deduction, the ‘starting value’, depends on the circumstances of the leased asset (CTA10/S364-365). These circumstances are outlined below:

For accounting periods ending on or after 1 April 2010.

The general rules for calculating the starting value of the plant and machinery are set out at CTA10/S364. However, the general rules at CTA10/S364 do NOT apply if the conditions in section 365(2) are met. In such case CTA10/S365 will apply instead.

“Starting value”: general

If CTA10/S364 applies and the only use of the plant or machinery by the lessor has been the leasing of it under the section 363 lease as a qualifying activity, then the starting value is the amount of the expenditure incurred by the lessor on the provision of the plant or machinery (or “cost”) ,

However, if the plant or machinery has at some point been used by the lessor for another purpose, then the starting value depends on the last previous use of the plant or machinery by the lessor:

  • if that use was the leasing of it under another long funding operating lease as a qualifying activity, the starting value is the market value of the plant or machinery at the commencement of the term of the section 363 lease (“market value”),
  • if that use was the leasing of it under a long funding finance lease as a qualifying activity, the starting value is the value at which the plant or machinery is recognised in the books or other finance records of the lessor at the commencement of the term of the section 363 lease,
  • if that use was for the purposes of a qualifying activity other than leasing under a long funding lease, the starting value is the lower of cost and market value.

“Starting value” where plant or machinery originally unqualifying

If the conditions in section 365(2) are met then CTA10/S365 will apply. These conditions are:

  • the lessor owns the plant or machinery as a result of having incurred expenditure on its provision for purposes other than those of a qualifying activity,
  • the plant or machinery is brought into use by the lessor for the purposes of a qualifying activity on or after 1 April 2006, and
  • that qualifying activity is the leasing of the plant or machinery under the lease.

Where those conditions are met then the starting value for the purposes of section 363 is the lower of -

  • first use market value, and
  • first use amortised market value.

“First use market value” means the market value of the plant or machinery at the time when it is first brought into use for the purposes of the qualifying activity.

“First use amortised value” means the value that the plant or machinery would have at the time when it is first brought into use for the purposes of the qualifying activity. The first use amortised value must have been calculated in accordance with assumptions set out at CTA10/S365(6).

For accounting periods ending before 1 April 2010.

The starting point for calculating the periodic deduction for accounting periods ending before 1 April 2010 was the ‘relevant value’ as defined at ICTA88/S502E(4). This also depended on the circumstances of the asset at the commencement of the lease and was calculated on a similar basis, but the terms of the legislation were slightly different.