Finance Leasing Manual - FLM31.38

Second condition: the major lump sum

The second of the five conditions which must be satisfied before a lease comes within Part I Schedule 12 FA 1997 targets directly the mischief at which Part I is aimed, namely the capacity of some finance leases to give the lessor a return on its investment which takes the form of capital rather than rental income.

The condition is that under the leasing arrangements (see FLM31.41) there may be payable to the lessor or a connected person a sum which is not rent but which under UK accounting standards is treated:

• in part as repayment of some or all of the investment in respect of the finance lease (or loan); and

• in part as return on that investment (Paragraph 3(2)Schedule 12 FA 1997).

That sum is referred to as a 'major lump sum'. The following features of this condition are considered below:

• leasing arrangements - see FLM31.41;

• payments to connected person - see FLM31.42;

• exclusion of rent - see FLM31.44;

• repayment of investment - see FLM31.45;

• inclusion of return on investment - see FLM31.49.