Finance Leasing Manual - FLM5.14

Comparing leasing and lending: tax position

In contrast to the commercial accounting, the tax position differs depending on whether there is a finance lease or an actual loan.

Lessor / lender

• The taxable income of a lender is the interest receivable. From this is deducted the interest payable and other expenses. This is exactly the same as in the commercial accounts.

• The gross taxable income of a finance lessor is the gross rentals ('interest' and 'capital' elements). From this is deducted interest payable, other outgoings and any capital allowances. Unlike the commercial accounts, the 'loan repayment' (capital) element in the rentals is also taxable income but capital allowances are available instead if any expenditure qualifies for them.

Lessee / borrower

• The taxable profits of a borrower are calculated by deducting the loan interest payable. This is the same as in the commercial accounts.

• The taxable profits of a finance lessee are calculated in principle in the same way as the commercial accounts, by deducting:

• the interest payable in accordance with correct accounting principles (see FLM10.13); this is normally the same as the figure in the commercial accounts; and

• the depreciation on the leased asset in accordance with correct accounting principles (see FLM10.13); again, this is normally the same as the depreciation charged in the commercial accounts. The capital element will normally follow the accounts depreciation charges because of SP3/91, see FLM11.21.

Whether the tax treatment of the lessee actually follows the commercial accounts depends mainly on whether those accounts were drawn up in accordance with correct accounting principles. For lessors, there may be cases where the true profits only emerge in a group's consolidated accounts and Schedule 12 FA 1997 takes this into account (see FLM27.01 onwards).