Finance Leasing Manual - FLM11.34

Termination adjustments: example

This example shows the computational adjustments needed on termination where SSAP21 has not been applied in preparing the lessee's accounts (see FLM11.55). The facts are:

• an asset cost £10,000; its estimated useful life is 6 years;

• finance lease rentals £4,000 pa in arrear over a primary period of 3 years; nominal thereafter

• the asset is sold at end of year 4 for £5,000 and proceeds paid to lessee as rental rebate

• Accounting treatment of rentals - SSAP 21 not followed; rentals charged against profits of the primary period at £4,000 pa.

• Accounting treatment of rebate - rental rebate of £5,000 credited in year 4

• Tax Treatment of rentals - it has been agreed that rentals are spread evenly over useful life of asset (6 years), so the trader is given deductions of £2,000 a year for each of the three years by the time the asset is sold.

The tax treatment of the rebate of £5,000 in the example above differs from the accountancy treatment. Instead of treating the rebate of £5,000 as a taxable receipt, a further deduction for rentals of £1,000 is due calculated as follows:

Rentals paid: 3 x £4,000 = £12,000
Rebate: £(5,000)
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Net outgoing £7,000

Tax deductions given so far: 3 x £2,000 = £6,000
Further deduction due is £1,000
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To give total deductions of £7,000