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HMRC internal manual

Business Leasing Manual

Taxation of long funding leases: Lessees: Limit on deductions

In the case of a long funding finance lease, the lease rentals are restricted to the finance charges that are (or would be) shown in accounts prepared under GAAP (CTA10/S377)

The effect of this restriction is that the lessee obtains a deduction for the full amount of the rental payments, partly by way of a deduction for the finance charge element and partly by way of capital allowances. The capital allowances computations ensure that if a lease terminates early the appropriate capital allowances are available to the lessee, see CA23825.

The same principle applies where, exceptionally, the lease is accounted for as a loan.