Finance Leasing Manual - FLM5.06

Tax timing advantages of finance leasing

It is important to appreciate how tax affects the choice between leasing and ordinary borrowing. Broadly, the capital allowances due to a lessor should only make a difference to the timing of the lessor's tax liability as compared to the tax liability of an equivalent lender. The capital allowances should not normally represent a gross amount of extra relief. But the legitimate timing gains which can arise because of leasing may be very valuable.

Broadly speaking, there should be no material overall difference between the commercial and tax profits of a lessor and a lessee on the one hand and a lender and borrower on the other hand. The basic explanation of the reasons for this are set out in FLM3.01 onwards. However, the issues are more complex than the basic explanations suggest. This is for two main reasons.

• First, lessors have found ways to maximise taxation gains that were never intended.

• Second, the timing issues are subtle: see FLM6.28 onwards.