Finance Leasing Manual - FLM26.01

Back-loaded leases: avoidance

This Chapter explains the schemes which Schedule 12 FA 1997 was enacted to counter. These schemes mainly exploited the old Schedule A tax rules for income recognition, whilst recognising the lessor's interest earnings in the commercial accounts in the usual way. The schemes fall into two main categories:

• straightforward back-loaded or stepped rental leases (in which tax was substantially deferred)- see FLM26.02

• schemes which converted 'income-into-capital'(in which tax on some of the lessor's investment return was avoided completely by arranging for the lessor's interest to be paid as part of a capital sum liable, in principle, to a capital gains charge but in practice covered by indexation and other reliefs) - see FLM26.02.

The straightforward back-loaded leases are dealt with in Part II of Schedule 12, FA 1997. The 'income-into-capital' schemes are dealt with in Part I. There is a common thread to the approach of both Parts. The differences stem from differing commencement provisions and the need to deal with capital allowances in Part I cases.