Finance Leasing Manual - FLM31.50

Second condition: approach in practice

Finance leases which are not intended to provide a facility to turn rental income into capital may sometimes contain provisions whereby a 'major lump sum' may be generated in certain exceptional circumstances. For example, the lessor may require a lease to be terminated by a payment from a connected person of the lessee to purchase the leased asset if the lessee defaults on rentals. The payment required in those circumstances may include arrears of 'interest' accruing since the last rental payment even though rental payments have been fixed from the start at a level which ensure that they pay all the 'interest' on the 'loan' and repay some of the principal.

In recognition of these situations the following assurance was given in the article on Schedule 12 published in the April 1997 issue of Tax Bulletin:

`Where no lump sum which may be payable under the leasing arrangements can exceed the lessor's capital expenditure on an asset, we would not normally seek to argue that Part I applies. This is subject to our right to argue otherwise where attempts are made to exploit this practice to turn income into capital.`

Cases where you consider such an attempt is being made should be reported immediately to BTD4 Leasing.