Finance Leasing Manual - FLM26.12
Example of commercial and tax profits
The practical effect of the tax treatment before Schedule 12 FA 1997 may emerge more clearly with an over-simplified Part II Schedule 12 finance lease example. Suppose:
- there is a 3 year finance lease of a real property asset
- the total rentals due are £900
- the total interest element in those rents is £120
- the total capital element in those rentals is £780
- the rentals due for each of the three years are, respectively, nil, £300 and £600.
The total gross commercial earnings are the 'interest' element of £120:
- £90 is earned in Year 1
- £30 is earned in Year 2
- there are no commercial earnings in Year 3 in this case.
In practice, rentals are usually payable monthly or quarterly in advance. In that case the gross commercial earnings would be spread over the three years. The figures in the example are over-simplified to illustrate the principle.
Depreciation
In finance leasing circles the second line in the account is normally called 'depreciation'. In this example there are total deductions from the rents due of £870 (in Years 2 and 3). There is an addition of £90 in Year 1. Setting this off against the £870 deductions for Years 2 and 3 produces £780, which is the capital element in the gross rentals (the 'loan repayment').
