Finance Leasing Manual - FLM13.28

Sale and leaseback: sale of asset

The accounting treatment is designed to reflect the commercial reality that in economic terms the asset has not been disposed of (see FLM13.14). Modern accountancy techniques (based on FRS5) ignore the sale altogether. But for tax purposes the sale cannot be ignored. In most instances the vendor/lessee's interest in the asset before the sale and lease-back will be capital for tax purposes and should be treated as such. For tax purposes there is a clear distinction between 'capital' and 'revenue' expenditure and receipts, a distinction that is not mirrored in accountancy practice.

In most cases the disposal will give rise to a capital sum for tax purposes but in practice it is unlikely that any tax on the disposal will be payable immediately - if such tax were payable, sale and finance lease-back would probably not be a commercially attractive way of raising finance. For example, the asset will often be plant and machinery. The sale proceeds will be covered by the pool of qualifying expenditure for capital allowances purposes or by Schedule D Case I losses.