Finance Leasing Manual - FLM34.01

Schedule 12 FA 1997: bad and doubtful debts: lessor's rentals within Schedule D Case I

Schedule 12 FA 1997 contains no special relieving provisions for lease rentals which become bad or doubtful. This is because general Case I principles and Section 74(1)(j) ICTA 1988 give appropriate relief as they stand in the form of a separate trading deduction.

For example, take the case of an existing lease with a stepped rental profile outside Schedule 12 where the lessee becomes insolvent (and for simplicity the asset becomes worthless).

• For accountancy purposes, the lessor will write off the debtor balance(s) under SSAP 21 in respect of that lease.

• For tax purposes, however, bad debt relief is restricted to unpaid rentals which have been recognised as rental income for tax purposes - to the extent that the write off represents future rental income not yet recognised for tax, no deduction is due in computing taxable trading profits before capital allowances.

The fact that the leased asset has become worthless will be reflected one way or another in the capital allowances computation (to the extent that the leased asset attracts capital allowances).