The tests for a long funding lease are carried out independently
by lessors and lessees. So a long funding lease for a lessor may
not be a long funding lease for the corresponding lessee.
If a lessor owns an asset and leases it out under a lease
that is not a long funding lease the lessor will be entitled to
capital allowances in the normal way. Without further action this
would enable both lessor and lessee to obtain capital allowances as
it would be very easy to arrange for the lessor to treat the lease
correctly as a lease that is not a long funding lease and for the
lessee to treat the lease correctly as a long funding lease.
Therefore there are rules in CAA01/S70Q which prevent two
claims to capital allowances on the same asset. Priority is given
to the lessor, so if the lessor can claim capital allowances (or
could if it was within the charge to tax) no lessee can do so. The
rules also apply to chains of leases (head lease, sub-lease,
sub-sub-lease and so on). Guidance on these rules is at CA23820.
In addition, there are rules in CAA01/S70H that mean that, in
the hands of a lessee, a lease is only a long funding lease if it
makes a return for the ‘initial period’ – see
BLM20120 – on the basis that the
lease should be taxed as a long funding lease. This allows lessees
to stay outside the long funding lease regime if they wish.
If the lessee chooses not to treat the lease as a long
funding lease it may claim a deduction for lease rentals in the
normal way, see
BLM20120. Once a lessee has made a
return on the basis that a lease is not a long funding lease, then
that establishes the nature of the lease in the lessee’s
hands. A lessee can change its mind within the period allowed for
amending a return, but it is otherwise bound by the treatment
adopted in its returns.
