Finance Leasing Manual - FLM2.10

Finance leasing: tax treatment

The tax treatment of finance leasing is different from the accountancy because, generally, it follows the legal form. The tax system continues to regard the finance lessor as the owner of the kit and, therefore, as the person entitled to any capital allowances (and not the lessee, except in certain hire purchase cases within Section 60 CAA 1990).

For tax purposes the finance lessor has leased the kit to the finance lessee for a revenue hire charge. Hence, the gross rentals due under a finance lease ('interest' plus 'capital' repayments) are all on revenue account. The gross rentals are:

• all taxable as income in the hands of the finance lessor (the capital cost of the leased kit may qualify for capital allowances; in a machinery and plant case the cost of the kit should normally equal the capital element in the rentals); and

• all deductible as revenue expenses in the hands of the finance lessee.