Finance Leasing Manual - FLM11.71

Pre-use rentals: tax treatment of non-finance charge element

The payment made prior to the time the asset comes into use may also include amounts in addition to the finance charge ('interest') element, being the balance of the rent due under the lease (that is, the 'loan' repayment element). Under SSAP21 these amounts will be set against the obligation outstanding (that is, they will be deducted from the outstanding 'loan' in the balance sheet).

However, for tax purposes no further deduction in respect of the lease rentals (over and above the finance charge element) should be given until the period of accounts in which the asset comes into use. The appropriate measure of the deduction, in addition to the finance charge element, due in that period will normally be the depreciation charge calculated by reference to the shorter of the lease term (normally including any secondary or later periods) or the asset's useful life.

In some cases there may be doubt over when an asset comes into use for this purpose. You should consider critically any contention that an asset has come into use before it is regarded as having done so in the commercial accounts. This will normally be signalled by the date on which the rights in the asset start to be depreciated in the accounts drawn up under SSAP 21.