Finance leases may also be written for assets, such as buildings
in Enterprise Zones qualifying for a 100% initial allowance (see
CA37050 onwards) which are not likely to lose value at all over the
life of the lease, including any secondary or later periods.
The rights in such a leased asset will not be depreciated in
the lessee's accounts drawn up under SSAP 21. Effectively, the
accounting treatment assumes that the prospective rental rebate
provided for in the lease will not be less than the non-finance
charge element of the rentals; the lessee will consume none of the
value of the asset during the period he uses it. In short, the
asset is expected to hold its value and so no depreciation charge
is necessary.
In accordance with
BIM61130, only the finance charge
element in the rentals is deductible over the period of the lease.
If the rebate turns out to be less than the total non-finance
charge element in rentals paid, the difference will be deductible
on termination. If, in accordance with correct accountancy
principles, the asset starts to be depreciated during the lease
term, a deduction for lease rent equal to the depreciation can be
given for tax purposes.
In some exceptional circumstances (for example in the water
industry) regulatory requirements may prevent the rights in leased
assets from being depreciated in the lessee's accounts drawn up
under SSAP 21, although the assets do in fact lose value over time.
In those circumstances - and in those circumstances only - the
allocation of the rentals to periods of account for tax purposes
may be made by reference to the depreciation which would reasonably
have been charged in the absence of this requirement.
Otherwise, if depreciation of a finance leased asset is not
recognised in the lessee’s commercial accounts no deduction
for it (representing the ‘capital’ element in the
lessee’s rentals) is allowable for tax purposes either.
