BLM30015 - Taxation of leases that
are not long funding leases: tax advantages: continued attraction
of leasing
Finance leasing
Although finance leasing does not allow off balance sheet
financing it is attractive for two main reasons
- First, there is the industry's argument
that a lessor who owns an asset is financially more secure than a
mere lender. Lessors are therefore more prepared to lend to less
solid businesses and, perhaps, to lend cheaper than ordinary
lenders (even leaving aside tax considerations).
- Second, finance leasing has been able to
provide cash-flow timing gains over a loan, particularly when the
lessee is tax exempt or 'tax exhausted' (that is, has no current
tax liability because of losses, capital allowances etc). The
rentals are reduced to reflect the timing advantages gained by the
lessor from the capital allowances.
Operating leasing
Operating leasing allows off balance sheet financing as well
as providing the same two benefits as finance leasing.
However, in most cases an operating lessor faces more
commercial risks than a finance lessor. In addition, of course,
much operating leasing is unrelated to financing, merely making an
asset available to a lessee for short period of the asset’s
useful life.
Guidance on the tax benefits of operating leasing is at
BLM31200.
