Finance Leasing Manual - FLM21.25

'Capital element' in lessors' rentals

Before Schedule 12 FA 1997, there were no special finance leasing rules to regulate for tax purposes the recognition of the finance lessor's 'interest' and 'capital' earnings. Schedule 12 aims to ensure that the minimum 'interest' earnings is the correct accountancy earnings. But Schedule 12 does nothing about the lessor's recognition of the 'capital' element in finance lease rentals.

It is not easy to find a convenient term to describe these payments. What is sometimes called the 'capital' element in the rentals is actually part of what are, for tax purposes, revenue earnings. The gross rentals are only split into 'interest' and 'capital' elements in an economic sense. Since the 'capital' element is a revenue receipt for the lessor the basis on which it is recognised, in the absence of special finance leasing rules, is the normal basis for the type of income concerned.