BLM24315 - Defining long funding
leases: election: following the accounts: operating leases -
general
In outline, under the rules for taxing long funding operating
leases
- the full rentals remain taxable but a
deduction from profits is allowed to compensate for the lack of
capital allowances. This deduction reflects the expected reduction
in value of the asset (including additional capital expenditure),
apportioned over the term of the lease on a straight line basis. In
essence it is similar to depreciation,
- any profits or losses arising to the
lessor when the lease is terminated and the asset is sold are taxed
or relieved when they arise. Profits or losses are calculated in
accordance with the rules in ICTA88/S502G or ITTOIA05/S148F,
- if an asset is used for a series of
leases, the long funding lease rules assume that the asset is
revalued to market value at the end of each lease.
Further guidance on the taxation of long funding operating
leases is at
BLM41000 (lessors) and
BLM42040 (lessees).
Where a lessor writes a large number of operating leases the
administrative burden of following the statutory calculation for
each lease could be too high to make an election viable. However,
using the appropriate accounting methodology would mean that the
accounts are drawn up in a way that gives the result that would be
achieved by following the strict statutory method.
In considering whether the figures in the accounts give the
same result as the statutory methodology, there are three principal
areas that need to be considered. These reflect the three issues
mentioned above
In considering whether the accounts give the same result as the
statutory method it should be borne in mind that
- the statutory method requires the use of
some estimates, particularly concerning market value and residual
value and therefore there is no absolute right answer for any one
period. Over time, however, the total taxable profits should,
inevitably, equal the commercial profits, just as is the case under
the rules for taxing leases that are not long funding leases.
- what matters is that the total taxable
profits for the accounting period are correct but the profits from
each lease do not have to be precisely the same as the statutory
method.
