Finance Leasing Manual - FLM31.28

First condition: different treatment in group consolidated accounts

There may be cases where the lease is correctly treated as an operating lease from the perspective of the lessor but from the wider group perspective is regarded as a finance lease. Paragraph 3(1)(b) of Schedule 12 provides that leasing arrangements are to be regarded as a finance lease (and the first condition satisfied) if they should be treated as such in group consolidated accounts reflecting the arrangements, drawn up under UK standards.

This rule in Paragraph 3(1)(b) is aimed particularly at cases where the exit arrangements under the lease do not involve the lessor in the disposal of the leased asset but instead the lessor's parent company may sell the issued share capital of the lessor to a member of the lessee group for a price which enables the lessor group to make overall a normal finance lessor's profit. Such deals are uncommon because they are likely to involve 'arrangements' put in place at the start of the lease which come within the group relief anti-avoidance provisions in Section 410 ICTA 1988 (described at CT 2685). Those provisions prevent the lessor company from surrendering trading losses etc as group relief.