A finance lease will normally contain provisions whereby, when the lease comes to an end, the lessee receives a rental rebate (or sometimes pays a further sum) by reference to the value of the asset at that point. This adjustment reflects the fact that under the lease the risks and rewards of ownership (though not the legal title) substantially lie with the lessee.
To the extent that these sums are in essence adjustments of past
revenue outgoings they are on revenue account and should be taken
into account in the computation of trading profits for the period
in which they are recognised in the lessee's accounts under correct
accounting practice. This is subject to the proviso that the sum
taken into account in this way should be such as to ensure that
over the life of the lease deductions are made for the aggregate
rentals paid (net of any rebate but including any supplementary
rental).
Where the total rentals paid are different from the rentals
so far allowed for tax (for example under pre-12 April 1991 leases
to which SP3/91 does not apply), the sum paid or received on
termination will have to be adjusted for tax purposes to achieve
that result. This approach applies whether the lease is brought to
an end at the conclusion of its full term, at the end of its
primary period or at an earlier point.
Facts
Pre-12/4/91 lease; Asset cost: £10,000; Estimated useful
life: 6 years.
Finance lease rentals £4,000 p.a. in arrear over a
primary period of 3 years; nominal thereafter.
Asset sold at end of year 4 for £5,000 and proceeds paid
to lessee as rental rebate.
Accounting treatment
SSAP 21 not followed; rental charged against profits of the
primary period at £4,000 p.a.
Rental rebate of £5,000 credited in year 4.
Tax treatment of rentals
It is agreed that rentals are spread evenly over useful life
of asset (6 years). That is, the trader is given deductions of
£2,000 a year for each of the three years before the asset is
sold.
Tax treatment on termination
Instead of treating the rebate as a taxable receipt a further
deduction for rentals of £1,000 is due calculated as
follows:
| Rentals paid | £4,000 p.a. x 3 = | £12,000 |
| Rebate | £(5,000) | |
| Net outgoing | £7,000 | |
| Tax deductions given | 3 x £2,000 = | £6,000 |
| Therefore further deduction due is | £1,000 | |
| To give total deductions of | £7,000 |
