Finance Leasing Manual - FLM13.08

Sale and leasebacks: first accounting method

Under the first method in SSAP21 the asset may be treated as sold and the profit amortised over the lease term; the finance lease is then accounted for as a separate transaction.

This accounting treatment is followed for tax purposes as long as the asset is sold at a fair value. This means that:

• if correct accountancy principles have been applied, the finance and depreciation charges arising from the finance lease may be accepted for tax purposes as a means of spreading the rental payments - in just the same way as they would have been if the asset had been finance-leased from new;

• the profit on the sale of the asset is capital in nature, so must be deducted in computing the taxable profit;

• there will be the usual capital allowances balancing adjustment consequences on the sale of the asset;

• there may also be a capital gains charge on the profit on sale of the asset;

• the finance lessor cannot have first-year allowance (if any is otherwise available) and will get writing-down allowances on, as a maximum, the original cost of the asset to the seller; that is, the cost to the lessee who has now leased the asset back (CA2120 onwards).