BLM51005 - IFRS16 leases: IFRS 16 Lessees: Taxation of IFRS 16 lessees: taxation of short leases

In the following guidance, a lease which IFRS requires a lessee to recognise a right-of-use asset on its balance sheet (except for certain exempted leases – see BLM17010) is referred to as a right-of-use lease.

Any right-of-use lease which does not meet the tests to be a Long Funding Lease will be taxed as any other trading expense. In particular the guidance on Finance lessees in BLM32200 applies equally to the right-of-use lease. Lease rentals are revenue expenditure, regardless of the IFRS 16 accounting treatment, unless there are particularly exceptional circumstances such as those described in BLM32230.

Where IFRS 16 has been correctly applied then the accounting recognition in the profit and loss for the right-of-use lease and interest on the lease liability correctly accrues the lease rental costs. Practically this means that the yearly depreciation of the rental costs and the interest expense recognised on the lease liability is deductible in computing the taxable profits of that period. There is no change to the basic approach as was originally set out in SP3/91 and subsequently in BLM32210. There are exceptions to this based upon basic principles of taxation, such as whether any of the depreciation of the right-of-use asset is capital.