Finance Leasing Manual - FLM11.01

Finance lessees: introduction to tax treatment of rentals paid

The principal issue concerning the treatment of a finance lessee under Cases I and II of Schedule D is the timing of the tax deduction for rentals. As explained in earlier chapters the accounting treatment requires an analysis of rental payments between the cost of the underlying asset (the capital element of the rent) and financing charges (the interest element of the rent). This chapter gives guidance on the general issues concerning the deductibility of rents, principally the deductibility of the 'capital element' of the rent.

This chapter only deals with payments of rent (including rent paid and rebates received on termination). In particular it does not consider incidental costs concerned with leasing transactions (often capital - see FLM12.62) or costs concerned with the modification of the leased asset.