CA23815 - PMA: Long funding lease: pre-commencement rentals, additional expenditure
CAA01/S70C, S70D
Pre-commencement rentals
If the lessee pays rentals under a finance lease before the term
of the lease begins and relief is not available for those rentals
any other way, add them to the present value of the minimum lease
payments at the commencement of the lease to get the lessee’s
capital expenditure. For example, the lessee may have accounted for
the pre-commencement rentals as loan repayments. If so only the
interest element will be an allowable deduction in computing
profits. The lessee can add the capital element of the loan
repayments made before the term of the lease begins to the present
value of the minimum lease payments at the commencement of the
lease.
If the lessee did not use the asset for a qualifying activity
before the commencement of the term of the lease it can get relief
for pre-commencement rentals if no relief would have been available
for those rentals even if the asset had been used for a qualifying
activity.
Example Up the Creek Plc. leases a ship to
Robertson Shipping. Robertson Shipping treats the lease as a long
funding lease that is a finance lease. It paid rentals under the
lease before the term of the lease began. Robertson Shipping finds
that it cannot get relief for the capital element of those rentals
because it has accounted for them as loan repayments. It can treat
that capital element as capital expenditure incurred on the
provision of the ship and claim PMA on it.
Additional expenditure
There are further rules that apply where the lessor treats the
long funding lease as a finance lease.
If the lessor incurs expenditure on the asset after the long
funding lease has been granted the present value of the
lessee’s minimum lease payments may increase. In that case
treat the lessee as incurring additional capital expenditure equal
to the increase on the date on which the increase is first
recognised in the lessee’s books or other financial records.
Example As in the example above Up the Creek Plc.
leases a ship to Robertson Shipping. Robertson Shipping treats the
lease as a long funding lease and claims capital allowances. Up the
Creek Plc. incurs further expenditure on the ship while Robertson
Shipping is leasing it. If the present value of Robertson
Shipping’s minimum lease payments increases Robertson
Shipping can claim PMA on the increase.
If Robertson Shipping did not treat the lease as a finance
lease there would be no relief due to it for Up the Creek
Plc.’s additional expenditure.
