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HMRC internal manual

Capital Allowances Manual

From
HM Revenue & Customs
Updated
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PMA: Long funding lease: pre-commencement rentals, additional expenditure

CAA01/S70C, S70D

Pre-commencement rentals

If the lessee pays rentals under a finance lease before the term of the lease begins and relief is not available for those rentals any other way, add them to the present value of the minimum lease payments at the commencement of the lease to get the lessee’s capital expenditure. For example, the lessee may have accounted for the pre-commencement rentals as loan repayments. If so only the interest element will be an allowable deduction in computing profits. The lessee can add the capital element of the loan repayments made before the term of the lease begins to the present value of the minimum lease payments at the commencement of the lease.

If the lessee did not use the asset for a qualifying activity before the commencement of the term of the lease it can get relief for pre-commencement rentals if no relief would have been available for those rentals even if the asset had been used for a qualifying activity.

Example Up the Creek Plc. leases a ship to Robertson Shipping. Robertson Shipping treats the lease as a long funding lease that is a finance lease. It paid rentals under the lease before the term of the lease began. Robertson Shipping finds that it cannot get relief for the capital element of those rentals because it has accounted for them as loan repayments. It can treat that capital element as capital expenditure incurred on the provision of the ship and claim PMA on it.

Additional expenditure

There are further rules that apply where the lessor treats the long funding lease as a finance lease.

If the lessor incurs expenditure on the asset after the long funding lease has been granted the present value of the lessee’s minimum lease payments may increase. In that case treat the lessee as incurring additional capital expenditure equal to the increase on the date on which the increase is first recognised in the lessee’s books or other financial records.

Example As in the example above Up the Creek Plc. leases a ship to Robertson Shipping. Robertson Shipping treats the lease as a long funding lease and claims capital allowances. Up the Creek Plc. incurs further expenditure on the ship while Robertson Shipping is leasing it. If the present value of Robertson Shipping’s minimum lease payments increases Robertson Shipping can claim PMA on the increase.

If Robertson Shipping did not treat the lease as a finance lease there would be no relief due to it for Up the Creek Plc.’s additional expenditure.