Finance Leasing Manual - FLM6.52

Deferral of income and / or conversion of income into capital

Arrangements which deferred the taxation of income mainly exploited the old Schedule A rules for income recognition. Either tax was substantially deferred or it was avoided completely by arranging for the lessor's interest to be paid as part of a capital sum liable, in principle, to a capital gains charge but in practice covered by indexation and other reliefs. This was despite the fact that the lessor's interest earnings were recognised in the commercial accounts in the usual way regardless of the form which they took.

We believe that FA97/S82 and FA97/SCH12 have blocked the tax advantages of these arrangements by treating the lessor's minimum earnings for tax purposes as equal to the earnings in its accounts. See FLM27.01 onwards for full details.