One issue ignored earlier is that timing differences created
by tax will usually alter the lessor or lender's own borrowing
costs. And, because tax timing benefits are usually passed on,
wholly or partly, to the lessee or borrower, the commercial and
taxable profits of the lessor or borrower may change.
Example
The lessor will have to spend £1m when it buys the kit so
it needs to borrow £1m at the outset on which it pays 5%
interest. If the kit is bought on the last day of the tax year, the
lessor will get the cash benefit of the 25% writing down allowances
(£75,000) nine months later. Ignoring other expenses and
receipts, after nine months the lessor's borrowings will reduce by
£75,000, in addition to any reduction as a result of the
‘capital’ element in the lease rentals received by that
time.
The actual reduction in the lessor's borrowings will
obviously depend on the pattern of rental receipts and outgoings.
But, in principle, the lessor's own interest costs will reduce at
the nine month point as the lessor can use the value of the tax
relief to pay off a similar amount of its own borrowings.
Alternatively it can retain and invest the value of the tax
benefit, if necessary by charging fellow group companies if the
losses have been surrendered as group relief.
