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HMRC internal manual

Business Leasing Manual

Plant and machinery leasing - Anti-avoidance: Non-long funding lease rules: Restriction to the deductions available to lessee -sale or lease and leaseback

Accounting periods ending on or after 17 March 2004

For accounting periods ending after 16 March 2004 where there is a sale and finance leaseback, section 228B CAA 2001 acts to restrict the lease rentals that may be deducted in computing the lessee’s income or profits (CA28920). This restriction was intended to recover any tax-free sum that the lessee may have received if the disposal value brought into account when the sale and finance leaseback was entered into was restricted under section 222 CAA 2001 (BLM61010).

The deduction for lease rentals is restricted to the permitted maximum. The permitted maximum for an accounting period is the total of:

* The finance charge shown in the accounts, and
* The depreciation, taking the value of the plant or machinery at the beginning of the leaseback to be the restricted disposal value under section 222 CAA 2001.
* When calculating the permitted maximum; start with the restricted disposal value, then write that amount off over the length of the finance leaseback to get the depreciation element. Enquiries may be needed about the seller’s computations to check that they have done this correctly. 
* Section 228B CAA 2001 also applies to a lease and finance leaseback, but in such cases the permitted maximum is calculated by reference to the finance charge only (section 228F(2) CAA 2001).


Donald carries on a trade in the UK. In 2004 he sells equipment to B, a bank resident in Spain, for £490,000 (market value) and finance leases it back over 10 years. Donald acquired the equipment in 1994 for £1,000,000 and it is depreciated on a straight-line basis over 20 years. So the depreciation charged in the accounts each year is £50,000.

The notional written down value of the equipment when Donald enters into the sale and finance leaseback is £500,000 but as market value is £490,000 Donald’s disposal value is restricted to the lower figure. Donald’s permitted maximum for an accounting period is the finance charge shown in his accounts plus the depreciation that would have been charged if the equipment had cost £490,000 and had been written off over the 10 year leaseback on a straight line basis

As this is a sale and finance leaseback the accounts should not record a disposal of the asset. Rather the asset will continue to be recognised on the balance sheet and depreciated. So in this example assuming straight-line depreciation over a 20-year life of the asset the asset will depreciate 5% per annum and the annual accounts will show depreciation of £50,000. The accounts depreciation should be added back for tax purposes as usual.

For a detailed explanation of ‘Finance charge’ and ‘Depreciation’, please see CA28920.