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HMRC internal manual

Business Leasing Manual

HM Revenue & Customs
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’Income-into-capital’ schemes and back loaded leases: Relief for set-offs against rentals: cumulative accountancy rental excess: how double taxation can arise

The basic charging mechanism in Part 21 of CTA 2010 is to tax for any period of account the greater of:

  • the earnings from the lease shown in the lessor’s accounts, (described in Part 21 as the ‘accountancy rental earnings’), and
  • the rentals which would be taxable apart from Part 21 (‘normal rent’).

In the case of a lease fully paid out by way of rentals, the total normal rent will obviously represent the total rentals from the lease. In such a case therefore, whenever for any period accountancy rental earnings have exceeded normal rent and have been taxed in their place, some rentals would ultimately be brought into account twice for tax were it not for the relief given. The measure of the doubly taxed income is the total of the excesses of accountancy rental earnings over normal rent.

Especially in the case of a lease within Chapter 2 of Part 21 the lessor may not take all of their return (in substance the repayment of the loan plus interest) by way of rentals. Part may be taken in the form of a capital sum from the sale of the leased asset (or an asset representing the leased asset). The disposal proceeds brought into a capital gains computation on that disposal may effectively include sums already taxed under Part 21 as accountancy rental earnings but never received in the form of rentals. The measure of the doubly taxed sum is again the total of the excesses of accountancy rental earnings over normal rent.