BLM22070 - Defining long funding leases: amendments, transfers and assignments: change in accounting classification of a long funding lease (CAA01/S70YA)
Only very rarely will the accounting classification of a
lease change, but it may happen – for example, where
accounting standards change and require the new standard to be
applied to existing leases. Where this happens it is necessary to
have rules to ensure that the tax treatment of the lease remains
fair.
It is clear that, as nothing may have changed in the lease
agreement itself, a change in accounting treatment does not mean
that a lease has terminated and another has begun. However, for the
rules taxing long funding leases to work it is necessary to treat
the lease as having been terminated and a new one begun at the
point the accounting treatment changes. These rules apply to both
lessors and lessees.
This is catered for by CAA01/S70YA. The rules are not as
simple as might at first be thought.
The basic proposition is that where, in the
relevant accounts, the accounting classification
changes from an operating lease to a finance lease, or vice versa,
the lessor (or lessee, as appropriate) is treated as terminating
the existing lease and entering into a new lease at the time of the
change.
There are two situations where the classification of a long
funding lease changes for the purpose of this section
- Situation 1 – where the lease changes from being accounted for as a finance lease or loan to being accounted for as an operating lease in the relevant accounts,
- Situation 2 – where the lease changes from being accounted for as an operating lease to being accounted for as a finance lease or loan in the relevant accounts.
The relevant accounts are
- the accounts of the person concerned, or
- where that person is a lessor, the accounts of any person connected to the lessor.
CAA01/S70Y (7) allows the Treasury to make regulations restricting the operation of CAA01/S70Y. No regulations have yet been made.
