Where SSAP 21 has been correctly applied in a finance lessee's
accounts no adjustments will normally be necessary in the tax
computation to give a Case I deduction, in the appropriate periods
and in accordance with the accruals concept, for total rentals
payable net of rebates. Correctly prepared accounts normally give
the right answer for tax purposes without further adjustments in
the tax computation. An exception to this general rule is
illustrated by the example at the end of
BIM61150.
The obvious compliance issue that arises is whether correct
accountancy principles have been applied or whether, in an attempt
to accelerate tax relief, the deductions for depreciation or the
‘interest’ element of the rentals have been
uncommercially front-loaded.
How the correct answer is achieved in arithmetical terms when
SSAP 21 has correctly been applied is illustrated by the
reconciliation at the end of the example in
BIM61055.
The charge for depreciation of the leased asset must not be
added back in the lessee's tax computation (it does not relate to
capital expenditure by the lessee) nor must the lessee's profit or
loss on sale of the leased asset be adjusted in the tax
computation.
The total of the depreciation charged in respect of the
leased asset, adjusted for any profit or loss on sale, is equal to
the total rentals paid less the finance charge element (charged
against profits separately) and adjusted for rebates (or sometimes
additional rental payments) on termination of the lease. See
BIM61160 regarding termination
adjustments generally.
As the depreciation charge also measures the rate at which
the value the business extracts from the leased asset is used up,
the result is to give a tax deduction consistent with the accruals
concept.
The use of SSAP21 in this way was approved by the Court of Appeal in the case of Threlfall v Jones [1993] 66TC77. It contains no concessional element. In particular it involves no deduction for depreciation as such. The allowance of the depreciation charge is simply a means of ensuring that rentals are deducted for tax purposes in a manner consistent with the accruals concept.
