Finance Leasing Manual - FLM11.33

Termination adjustments: tax consequences

Rental rebates received by lessees (or further sums paid by lessees) on termination, to the extent that they are in essence adjustments of past revenue outgoings, are on revenue account. They should therefore be taken into account in the computation of trading profits for the period in which they are recognised in the lessee's accounts under correct accounting practice. But this is subject to the proviso that the sum taken into account in this way should be such as to ensure that over the life of the lease deductions are made for the aggregate rentals paid (net of any rebate but including any supplementary rental).

Where the total rentals paid are different from the rentals so far allowed for tax purposes, the sum paid or received on termination will have to be adjusted for tax purposes to achieve that result (see the example at FLM11.34). This approach applies whether the lease is brought to an end at the conclusion of its full term, at the end of its primary period or at an earlier point.