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HMRC internal manual

Capital Allowances Manual

PMA- Anti-avoidance: Finance leaseback: further operating lease


Sometimes a person who is leasing plant or machinery under a sale and finance leaseback or a lease and finance leaseback will lease it out. If the lease under which the plant o rmachinery is leased out satisfies the following conditions:

  • the term of the lease begins on or after 18 May 2004,
  • the lessee or a person connected with the lessee is the person who entered into the sale and finance leaseback or the lease and finance leaseback,
  • the lessee accounts for the lease as an operating lease,


the following rules apply:

  1. The amount that the lessee can deduct in computing profits for the payments made under the lease is restricted. It cannot be more than the permitted maximum for the lessor’s deduction for lease rentals under the leaseback CA28920.
  2. If the lessor is due to make a payment to the lessee under the operating lease ignore it when you calculate the lessor’s income. Take the full amount of the lease rentals into account.
  3. When you calculate the lessor’s income or profits ignore income from the lease to the extent that it is more than the permitted maximum.

If only some of the plant or machinery is leased under the operating lease make a just and reasonable apportionment before you apply the above rules.

Example As in the example at CA28910 Anthony carries on a trade in the UK. He sells equipment to B, a bank resident in Spain, for £490,000, its then market value, and finance leases it back. The market value of the equipment at the time of the sale and finance leaseback is £490,000 and the notional written down value is £55,000. So Anthony’s disposal value is £55,000. Anthony’s permitted maximum for an accounting period is the finance charge shown in his accounts plus the depreciation that would have been charged if the equipment had cost £55,000.

Once Anthony has leased the equipment back he leases it to Cleopatra on an operating lease for an annual rent of £50,000. Suppose Anthony’s permitted maximum for his lease rentals to B is £8,000 a year. This means:

  1. Cleopatra can only deduct rent of £8,000 a year in computing her profits because £8,000 is Anthony’s permitted maximum for his lease rentals to B.
  2. If Anthony is due to give Cleopatra a rebate of £3,000 Anthony’s rental income is £50,000 not £47,000.
  3. Anthony’s rental income is restricted to £8,000. The excess over £8,000 is ignored because £8,000 is the permitted maximum.



A person accounts for a lease as a finance lease if:

  • under generally accepted accounting practice it falls to be treated in that person’s accounts as a finance lease or loan, or
  • where the lease is comprised in other arrangements, those arrangements fall under generally accepted accounting practice to be treated as a finance lease or loan.

A lease is an operating lease for a person if it is not accounted for as a finance lease in the person’s accounts.