Finance Leasing Manual - FLM21.22

Schedule D Case I: basis for recognising income: general principles

The following general points should be borne in mind in connection with the timing of a finance lessor's rental income:

• there is no principle of tax law which requires symmetry between lessor and lessee in the timing of rentals;

• where the asset leased is real property the lessor's rentals will be chargeable under Schedule A

• where the lessor's rentals are chargeable under Schedule D Case I the rentals should normally all be recognised over the primary period of the lease (even if the lessee's rental payments would be recognised over a longer period) since normally the lessor's economic stake in the transaction virtually comes to an end at the conclusion of the primary period of the lease;

• even when rentals are recognised by the lessor over the primary period you should still examine critically any treatment of rental income for tax purposes which has the effect of deferring the recognition of the finance charge element of rentals to a period later than that in which it is recognised in accounts drawn up under SSAP 21. (This is because the finance charge element of rentals is treated as income both under SSAP 21 and for tax purposes and in principle the timing of items for Case I purposes normally follows that in the commercial accounts - see IM542a);

• whatever method of recognising rental income for tax purposes is in use should be applied to all finance leases written by the same lessor and by connected lessors, especially other leasing companies in the same group; in particular, you should resist attempts to adopt different methods of recognition for leases with different rental profiles (whether flat-rate, front-end loaded or back-end loaded);

• however, you should consider carefully the guidance on changes of timing basis (IM540 onwards) before seeking to disturb a settled method of recognising rentals; in particular it would not normally be possible to insist that a revised method is applied to new leases while the current method is applied to leases already in existence - any change should in strictness be complete.