Finance Leasing Manual - FLM26.06

Back loaded leases: lessors' earnings within Schedule A

Many, if not quite all, of the finance leases in 'income-into-capital' schemes involved real property assets. So the lessors earnings are taxable under Schedule A. In practice most property companies use the accruals basis for their accounts and for tax under Schedule A. This is under a long standing practice announced by the Minister when old Schedule A was enacted in 1963. But the finance leasing schemes used the old strict Schedule A basis for real property income: for periods before 1 April 1998 a company's rental income was taxable in the period in which the lessor was 'entitled' to them; that is when the rents are payable. This made it easy to ensure that the rentals taxable in any period were the low amount desired by the lessor even though the lessor was reporting higher earnings in its commercial accounts.