Finance Leasing Manual - FLM6.02

Timing differences: finance lessor

In the example in FLM5.17 the finance lessor is taxable (like the bank) on a profit of £20 at the end of the day, but the 25% capital allowances of £250 due to the lessor in Year 1 will create an upfront tax loss of £76. This is on a simplified calculation which assumes:

• the total rentals of £1,200 are split evenly between the years;

• the 'interest' in and out is front-loaded in the usual SSAP 21 fashion;

• the 'other expenses' are slightly front-loaded;

• the asset is purchased at the start of Year 1.

This produces the following computation for the finance lessor for Year 1:

Gross rents receivable (£1,200 ÷ 5) £240
Less interest payable £58
----
Gross profit £182
Less other expenses £8
----
Net profit £174
Less capital allowances £250
----

Taxable profit (loss) (£76)

We recover this loss later and tax the profit of £20, as the following tax computations for the finance lessor for the whole five years shows:

Finance lessor's tax computations

The capital allowances for Year 5 assume a short-life election has been made and a balancing allowance is due on the worthless kit, thereby relieving the entire net cost over the 5 years (CAA90/S37).