Finance Leasing Manual - FLM2.19

Finance lessee: tax treatment

The tax treatment of a finance lessee's rentals is set out in Statement of Practice 3/91. It has not been regulated by statute but the cases of Gallagher v Jones and Threlfall v Jones (66TC77) in 1993 confirmed the view set out in SP3/91. A Tax Bulletin article in February 1995 gave further clarification.

The gross rentals payable by a trader are revenue in nature and allowable in computing profits. Generally accepted accountancy practice under SSAP21 divides the rentals into an 'interest' element and a 'capital' element, see FLM2.03. Where a finance lessee accounts for a transaction under SSAP21 the deduction of rentals equal to the finance ('interest') charge and the depreciation charge relating to the leased asset in the accounts will normally represent a convenient way of achieving a spread of the lessee's gross rentals which is consistent with the accruals concept. Circumstances in which the lessee's depreciation policy and practice may need to be checked are discussed at FLM12.65.