On premature termination of a finance lease payments may
occasionally be made which are not in the nature of adjustments to
past rentals but rather represent a charge imposed on the lessee as
consideration for being freed early from his obligations under the
lease. Where the assets leased are used as capital assets in the
lessee's business the lease itself is such a capital asset (see RTZ
Oil & Gas Ltd v Ellis [1987] 61TC132, especially page 172) and
an exit charge of this kind would be capital expenditure (see
Mallet v The Staveley Coal and Iron Company Ltd [1928]13TC772).
Whether a payment is an adjustment of past rentals (revenue
expenditure) or a charge of a penal nature (capital expenditure)
will depend on the facts of individual cases.
A termination payment equal to total undiscounted future
rentals, otherwise payable over a considerable period will contain
a capital element.
An adjustment reflecting an enhancement of the lessor's
return on his investment to compensate for, say, additional
administrative costs or reinvestment risk would be consistent with
the view that an exit charge was wholly an adjustment of past
rentals and therefore wholly revenue expenditure.
A payment calculated by discounting future rentals due and by
taking into account the value of the asset on the premature
termination would also be revenue expenditure.
