A further issue arises where the assets in question cease to
be subject to the 'deemed lease' before the end of the useful
economic life of the asset and in circumstances where a tax
deduction has not yet been given for a significant amount of
rentals already paid. Since, as a matter of general law, the lessee
always owns the asset (see
BLM34005) the lessee will actually keep
the asset when the 'deemed lease' ends. In these circumstances
giving a deduction in the year of termination for the unallowed
rentals would be contrary to the intention behind Statement of
Practice 3/91, which is to ensure that rentals are matched with the
income the asset can be said to generate in accordance with the
fundamental accounting concept of accruals.
In practice you should normally accept that the rentals
should be allowed as revenue deductions over the full economic life
of the fixtures concerned in the user's hands, whether or not the
fixture remains subject to the fixtures lease. The rate of
depreciation of the asset in accounts drawn up under GAAP is likely
to provide a means of ensuring an acceptable spread. This is
because the lessee actually owns the asset as a matter of general
law and so his depreciation provisions will be based on the true
life of the asset and not on the length of the finance lease.
You should therefore look closely at arrangements in which
the lessee claims that the rental payments should all be allowed
over the primary period or, alternatively, that the balance of
unallowed rentals should all be deducted when the lease ends. In
substance, the lessee may be paying capital instalments which are
not allowable in arriving at taxable profits. If you require
further guidance, please let CT & VAT (Technical) know.
