Finance Leasing Manual - FLM12.83

Terminal rebates: adjustments needed for tax purposes

For leases to which SP3/91 has been applied, no adjustments are needed; the accounting treatment is followed for tax purposes. The terminal rebate will be credited in the accounts applying recognised accountancy practice. In the first instance it will be set against any balance of rents not yet relieved (the finance lease asset). If the receipt exceeds this, there will be exceptional credit as a profit on the sale of a fixed (leased) asset. All you have to do is to ensure that this is not excluded from the taxable profit in the tax computation.

Consider the example at FLM10.42 in which the lease is terminated early at the end of the fourth year. The book value of the asset then is £40,000. The sale proceeds are £42,000 of which £400 is absorbed by the lessor's handling charge. The lessee gets credit for £41,100 (cash received £29,100 plus credit against outstanding liability and extra interest charge). The £41,100 is utilised-

• £40,000 offset against the rent as yet unrelieved (the two items cancel each other out: the lessee gets no further credit for rent paid, nor is he taxed on the recovery); and

• £1,100 is the profit on the disposal of an asset and is credited to the profit and loss as such. Just as the depreciation charged on leased assets represents a revenue expense (rent) and is not added back, so the rebate represents a revenue receipt and is not excluded either from the tax computation.