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HMRC internal manual

Business Leasing Manual

’Income-into-capital’ schemes and back loaded leases: 'Income-into-capital' schemes: commercial reality

The treatment of income-into-capital schemes in the commercial accounts is quite different to their tax treatment. Accountants are concerned to see that a proper measure of profit is recognised each year in order, for example, to ensure that successive generations of shareholders are treated fairly. Accountants believe that finance lessors make money each year from their finance leases.

Under accountancy rules, the Bank treats the deal as a ‘finance lease’ and this is shown in the accounts just like a loan. This means the Bank shows the interest earnings accruing over the, say ten year, period of a loan. The Bank doesn’t recognise interest income in Year 10 when it gets paid; it recognises the interest as it accrues over Years 1 to 10. Nor are accountants concerned about whether a receipt is income or capital, either way it represents the lessor’s return on their investment.