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HMRC internal manual

Business Leasing Manual

‘Income-into-capital’ schemes and back loaded leases: Definition of a Chapter 2 of Part 21 CTA 2010 lease: Condition A: group consolidated accounts - 'materiality'

CTISA (CT&BIT) have been told that sometimes leases which are clearly operating leases, whether viewed both from the perspective of the lessor company and its whole group, are lumped together with finance leases in the consolidated group accounts on the grounds that their relative value is so low that they are not ‘material’. You should adopt the approach set out in the article on Schedule 12 (now Part 21 of CTA 2010) published in the April 1997 issue of Tax Bulletin. The relevant extract is reproduced below:

`We have been told that the accountancy concept of materiality may cause what would otherwise be an operating lease to be classified in the accounts as a finance lease. In particular, operating leases in the accounts of individual group lessor companies might, we understand, be reclassified as finance leases in the consolidated group accounts on the grounds that the amount referable to operating leases was immaterial in the larger group context.

The Schedule focuses on the commercially correct accounting treatment of a particular leasing transaction in isolation from other unrelated leasing transactions undertaken by the lessor or group. If therefore, materiality aside, such a lease would be correctly classified as an operating lease then that is how it should be viewed for the purpose of these rules.`