Taxation of Leased Plant and Machinery

A News Release (PDF 60K) issued on 21 July 2005 announced that changes will be made to the way in which some leases of plant and machinery are taxed with effect from 1 April 2006.

Where leases of plant or machinery function essentially as financing transactions the new regime will tax them as such. In particular:

  • the lessor will bring in only the finance element of the rentals arising under the lease as income, and
  • the lessee will deduct only the finance element of the rentals payable over the life of the lease, and will be entitled to capital allowances.

The reform will apply to finance leases and some operating leases. With the exception of some hire purchase transactions, leases of less than 5 years will not be affected by the reform.

Draft core legislation is included in a Technical Note (PDF 275K) published on 5 December 2005.This draft includes -

  • an improved definition of a plant or machinery lease,
  • details of the commencement and transitional provisions, and
  • details of an exemption for certain plant and machinery leased with property.

Comments are invited and should be made by 6 February 2006.

A clarification of the draft legislation was issued on 23 January 2006.

This latest Technical Note updates the position following the publication of an earlier Technical Note (PDF 211K) on 21 July 2005 that, among other details, first described the commencement and transitional provisions. Further details were published on this site and are included here for reference.

An updated Partial Regulatory Impact Assessment (PDF 138K) was also published on 5 December 2006. Comments have been invited and should be made by 6 February 2006.

This reform was first proposed in a consultation document (PDF 352K) published in August 2003 and a Technical Note (PDF 2.28MB) setting out details of the proposals was published in December 2004.

This web page may be updated from time to time. In particular, further details that reflect HMRC's interpretation of the contents of the latest Technical Note may be added in response to questions of general interest.