Finance Leasing Manual - FLM10.23

Rule of 78: whether acceptable

Of all the methods, the Rule of 78 is the one that is most likely to allocate more interest to the first period and the least interest to later periods. It is an unsophisticated, rough and ready, method which is easy to calculate. It is based solely on the length of the loan period and the amount of the interest. It does not take account of all of the factors pertaining to the particular way in which the loan is repaid. It is nonetheless an acceptable method (including for tax purposes) provided that it is used in appropriate circumstances. What the appropriate circumstances are for using the Rule of 78 is essentially a matter of accountancy judgement, on which you would need to seek advice from your liaison accountants.

There may be circumstances where exceptionally the Rule of 78 would not provide an acceptable answer for tax purposes even though it has been used in the accounts and that treatment is acceptable for accountancy purposes. This would be the case if the treatment was inconsistent with the underlying facts (IM605c/e refers). One possible example of this is Example 2 at FLM10.50.