Finance Leasing Manual - FLM11.26

Lessee's rentals: SSAP21: application of principles

The reconciliation at the end of the example in FLM10.50 illustrates how the correct answer for tax purposes is achieved in arithmetical terms when correct accountancy principles are applied.

Note that the charge for depreciation of the leased asset must not be added back in the tax computation nor must the 'profit on sale' be deducted. The total of the depreciation charged in respect of the leased asset, adjusted for any profit or loss on sale, is equal to the total rentals paid less the finance charge element (charged against profits separately) and adjusted for rebates (or sometimes additional rental payments) on termination of the lease. See FLM11.31 regarding termination adjustments generally.

Since the depreciation charge should also measure the rate at which the value the business extracts from the leased asset is used up, the result is at the same time to give a tax deduction consistent with the accruals concept. See FLM11.27 and FLM12.65 onwards regarding depreciation charges generally.