Finance Leasing Manual - FLM2.13

Finance lessor: tax treatment of 'interest' element

For the tax treatment of the 'interest' element in the rentals, the aim is to follow the accountancy. As in other situations, the accountancy often provides a ready-made measure of the earnings. However, there have been avoidance schemes which either turned the 'interest' into a capital gain or deferred its recognition for tax (thus producing a mismatch between the commercial accounts earnings and the tax earnings). Schedule 12, FA 1997 seeks to impose the accountancy earnings as the minimum taxable earnings. In doing so it transmutes the 'capital gain' back into income. See FLM6.50 onwards.