Finance Leasing Manual - FLM13.12

Second accounting method: tax adjustments

Where the second accounting treatment is adopted, and the asset remains in the balance sheet at book value, the adjustments required for tax purposes are as follows.

• For the purpose of computing the lessee's rental deductions, the sale and lease-back of the asset is recognised. That is, there is a new finance lease and the rental payments are, in principle, allowable for tax purposes in the same way as for any other finance lease. But the actual depreciation charge in the accounts will reflect the old book value of the asset and so the accounts alone do not provide the right answer. The appropriate deduction for the capital element of the lease rentals will be an amount equal to the depreciation which would have been debited in the profit and loss account had the lease been dealt with under the first method described above and not the depreciation actually charged. But the rate of depreciation actually applied to the asset in the accounts will normally indicate the rate to be applied to the asset in this computation.

• The profit on the sale of the asset is again a capital profit. This profit will not have been taken to the profit and loss account so no tax adjustment will be needed.

• 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 the sale of the asset.

• The finance lessor cannot have first-year allowance (if any is otherwise available) and he 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).