A finance lessee may receive a sum at the end of the term of
a lease, whether the lease runs to full term or not. This is often
referred to as a refund of rentals. Under general principles this
refund would be taxable as income of the trade or other activity,
but in the case of a long funding lease it is taken into account in
computing the disposal value ICTA88/S502J ensures that this sum is
not brought into account as income under general principles.
For
example: A Ltd leases a machine that cost
£100,000 from B Ltd under a full payout finance lease over 8
years. The lease is a long funding lease and A claims capital
allowances on £100,000. At the end of the lease, by which time
A Ltd has – in effect – paid B Ltd for the full cost of
the machine plus interest, the machine is worth £10,000 and A
Ltd requires B Ltd to sell it. The lease agreement requires B Ltd
to pay 99% of the sale proceeds to A Ltd as a refund of rents and
so A Ltd receives £9,900.
If the lease had not been a long funding lease, the
£9,900 would have been taxable as income of A Ltd. However, as
the lease is along funding lease A Ltd brings £9,900 into its
capital allowances computation as a disposal value. Further
guidance is at CA23825.
