Finance Leasing Manual - FLM1.38

History of finance leasing

Large-scale finance leasing in the United Kingdom gained a substantial boost during the period of high first year allowances beginning about 1970 and ending, for most types of asset, in 1984. This investment incentive through the tax system, coupled on occasion with economic recession, meant that capital intensive businesses often found themselves tax exhausted and unable to benefit from the first year and other 'incentive' allowances due on their investment in fixed assets. Stock relief later accentuated the effects of first year allowances. At the same time financial businesses like banks did not enjoy these reliefs.

Finance leasing offered a means for the surplus first year allowances to be transferred away from businesses without current taxable profits to banks and others able to use them. In the process the users of the equipment obtained a significant part of the benefit of the tax allowances they could not use directly. This was achieved by leasing rates which reflected, often explicitly, the fact that the lessors could use the first year allowances. Companies trading as finance lessors could also surrender their tax losses under the group relief rules to fellow group members with trading profits, typically banking profits, which would otherwise have been exposed to tax.