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HMRC internal manual

Business Leasing Manual

’Income-into-capital’ schemes and back loaded leases: 'Income-into-capital' schemes: objectionable features

Prior to FA06, successive Governments allowed finance leasing to enjoy a favourable fiscal régime. Finance lessors were given capital allowances on assets which, in economic and commercial substance, they do not own. The quid pro quo was that the lessor should pay tax on the ‘interest’ and ‘capital’ elements in the lease rentals.

Following FA06, some finance leases (long funding leases) do not qualify for capital allowances.

The ‘income-into-capital’ schemes avoided tax on both elements of the rentals and arrangements which do this are objectionable. They turned deferral into a permanent loss of tax. Although FA97/Sch12 (now Part 21 CTA 2010) stopped some schemes, many more were developed, see the guidance at BLM80000.