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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: termination - general

When a long funding operating lease comes to an end, further adjustments may be necessary to ensure that the lessor receives relief for an amount that reflects the actual fall in value of the leased asset over the term of the lease. These provisions, which are at CTA10/S369, apply whether the lease ends at its expected termination date or earlier.

If the termination amount exceeds the sum of the amounts considered by CTA10/S369(3) on the termination of a long funding operating lease, then the excess is treated as income of the company attributable to the lease arising in the period of account in which it terminates. By virtue of CTA10/S381(3) termination amount is computed in accordance with CAA2001/S70YG

If the sum of the amounts considered by CTA10/S369(3) exceeds the termination amount, the excess over the termination amount is treated as a revenue expense that is incurred by the company in connection with the lease in the period of account in which the lease terminates.

The amounts considered by CTA10/S369(3) are:

  1. the total amounts paid to the lessee that are calculated by reference to the termination value (as defined in CTA10/S381(3)(m))
  2. the excess relevant value, given by
* the excess of the starting value of the plant or machinery for the purposes of section 363(4) over
* the total of the deductions allowable under section 363 for periods of account for the whole or part of which the company was the lessor
  1. the excess expenditure given by
* the excess of the total additional expenditure incurred in the case of the lease for the purposes of CTA10/S366, over
* the total of any deductions allowable under CTA10/S366

An example where the lease terminates as expected is at BLM41040.

An example where the lease terminates as expected is at BLM41045.

For accounting periods ending before 1 April 2010.

For accounting periods ending before 1 April 2010 the relevant legislation was at ICTA88/S502G.