BIM61105 - Leasing: Finance lessees: public statements

The principal issue concerning the treatment of a finance lessee under Cases I and II of Schedule D is the timing of the tax deduction for rentals. SP3/91 sets out the Revenue’s view in relation to leases entered into after its date of publication, 11 April 1991. Notes supplementing the guidance in SP3/91 appeared in the February 1995 issue of Tax Bulletin, TB15.

The material in SP3/91 and TB15 is substantially reproduced in BIM61105 - BIM61185. It only concerns finance lessees. None of it has any direct bearing on the timing of finance lease rentals in the hands of lessors.

Finance lease or hire purchase

If the agreement provides for legal ownership of the asset to pass to the lessee or gives the lessee an option at any point to purchase the asset concerned, the arrangement should be regarded as a hire purchase contract, see BIM45350.

Finance lease or operating lease

If the only issue is the timing of deduction of rentals, it may not be cost-effective to spend time exploring whether an agreement satisfies the accounting definition of a finance lease or is an operating lease. In either case the tax treatment is to allocate rentals to periods of account in accordance with generally accepted accounting practice and the timing differences that may arise from the way a lease is classified are likely to be small.

However, whether a lease should be classified as a finance lease under generally accepted accounting practice may affect the application of anti-avoidance legislation (such as FA97/SCH12) in computing finance lessors' taxable profits or entitlement to capital allowances.

Order in which rules applied

In certain circumstances rentals which would otherwise be allowable are restricted by statute. An example is ICTA88/S578A which sets a ceiling on the deduction for rentals of `expensive' motor cars (see CA2410 onwards). Another such restriction (in a sale and lease-back context) is imposed by ICTA88/S779 - ICTA88/S785 (see BIM61200 onwards).

Where statutory provisions of this nature are in point the adjustments required by SP3/91 should be made as a first step. Any further adjustment required under specific statutory provisions should then be made to the rentals allocated to the period of account under SP3/91.