Finance Leasing Manual - FLM34.26

Bad debts: Schedule A lessors: periods before 1 April 1998: computing relief

For lessors whose income is within Schedule A, for periods of account beginning before 1 April 1998 Paragraph 8(3)-(7) Schedule 12 FA 1997 set out the rules for bad debt relief which apply whenever Section 41 ICTA 1988 is disapplied. They are modelled on the Schedule D Case I rules described in IM 635 and include provision to ensure that bad debts recovered or re-credited are taxable (Paragraph 8(6). The relief or recovery charge are treated respectively as ordinary Schedule A deductions or rents.

Paragraph 8(8) and (9) ensure that double relief is not given for the same bad debt by addressing the point that the timing of the Section 41 relief and Schedule D Case I relief is different. Section 41 relief is always given for the period in which the lessor becomes entitled to the rent in question, even though it may not emerge that the debt for the rent is bad until some considerable time later. But Case I relief is given in the period in which the debt is found to be bad or doubtful, usually the same period as it is recognised in the accounts.

• If a claim under Section 41 is made after the period of account in which the lease first comes within Part I of Schedule 12, Paragraph 8(8) prevents relief under Section 41 from being given for a period of account prior to that. Iin such a case no objection should be raised to the granting of an appropriate Case I deduction for a current period instead.

• If a claim under Section 41 has already been successfully made prior to the time that the lease first comes within Part I of Schedule 12, Paragraph 8(9) puts beyond doubt that a Case I deduction cannot be given for a current period in respect of the relief already granted under Section 41.