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HMRC internal manual

Business Leasing Manual

’Income-into-capital’ schemes and back loaded leases: Bad debts: lessor's rentals within trading income - interaction with excess reliefs

Consider a new lease within Part 21 of CTA 2010 where the facts are otherwise exactly the same as those of the existing lease in the Example at BLM74001.

  • The stepped rental profile will cause the measure of taxable income for the initial years of the lease to be the accountancy rental earnings.
  • When the lessee becomes insolvent and the debtor balance is written off, the limit on the tax deduction due for the bad debt is again the amount recognised as taxable income.
  • As the amount recognised as taxable income is increased (compared with an existing lease outside Part 21) by the excess of accountancy rental earnings over normal rents (the amounts which would have been taxable but for Part 21), there are no grounds for Part 21 to include special relieving provisions for the bad debts of trading lessors.

But provisions are needed to ensure that excessive relief is not given as a result of the interaction of the rules in CTA10/S908 for relieving cumulative accountancy rental excess, with the relief available on Case I principles. The excess substantially represents rents not yet received which have already been taxed. If the tax charge on those rents is reversed by virtue of bad debt relief then there is no case for giving further relief under Section 908.

See the example at BLM74010.