Finance Leasing Manual - FLM11.13

Rents deductible as revenue expenditure: operating and finance leases

The classification of leases as between operating and finance leases determines how the rentals under the lease are recognised in the accounts, and the different treatment is likely to filter through into the tax computation (see FLM2.01 onwards).

Some special situations are considered at FLM12.03 onwards but, these aside, you will not normally find it cost-effective to spend time exploring whether an agreement satisfies the accounting definition of a finance lease (or is to be treated as if it were a finance lease under FRS 5) as against an operating lease. In either case the tax treatment is to allocate rentals to periods of account in accordance with the accruals concept and the timing differences that may arise to the lessee from the way a lease is classified are likely to be small.

However, whether a lease should be classified as an operating lease or a finance lease in the accounts of the lessor may make a substantial difference to the tax treatment of the lessor (see FLM6.50 onwards). The classification of leases for lessor and lessee may diverge for good reasons. But if you have had cause to investigate a border-line lease, you should consider sharing the information you have obtained about the lease with the inspector who deals with the lessor.