BIM61195 - Leasing: Finance lessors: timing of
lease rentals receivable
In contrast to the position for finance lessees it is not
possible to derive from SSAP 21 a comprehensive method of
allocating rentals to periods of account in computing the lessor's
profits under Schedule D Case I. This is because there are no
accounting entries, equivalent to the depreciation of the leased
asset in the lessee's accounts, to give a means of allocating the
non- finance charge element of rentals for this purpose. In
particular, the treatment of that element as a repayment of what is
regarded as a loan to the lessee (complementing the treatment of
the lessee under SSAP 21) does not necessarily bear a direct
relationship to the rate at which the lessor enjoys economic
benefits under the lease.
The following points should be borne in mind in connection
with the timing of a finance lessor's rental income:
- there is no principle of tax law which
requires symmetry between lessor and lessee in the timing of
rentals;
- in particular, since normally the lessor's
economic stake in the transaction virtually comes to an end at the
conclusion of the primary period of the lease, the gross rentals
should all be recognised over that period; this is the case even if
the lessee's rental payments would be deducted over a longer
period;
- the treatment of rental income for tax
purposes should not have the effect of deferring the recognition of
the finance charge element of rentals to a period later than that
in which it is recognised in accounts drawn up under SSAP 21. The
finance charge element of rentals is treated as income both under
SSAP 21 and for tax purposes and the accounting treatment is the
starting point in the timing of recognition of items for Schedule D
Case I purposes;
- whatever method of recognising rental
income for tax purposes is in use should be applied to all finance
leases (whether flat-rate, front-end loaded or back-end loaded)
written by the same lessor and by connected lessors, especially
other leasing companies in the same group.
More comprehensive guidance on the computation of finance
lessors’ taxable profits is given in the Finance Leasing
Manual. This includes guidance on the effect of the anti-avoidance
legislation in FA97/SCH12 on the computation of finance
lessors’ taxable profits from back- loaded leases and
‘income-into-capital’ schemes, see FLM27.01
onwards.
