Finance Leasing Manual - FLM35.05

Capital allowances: disposal proceeds more than cost of asset

The provisions in Paragraph 11 Schedule 12 FA 1997 are triggered by the occurrence of an occasion on which a 'major lump sum', as defined in Paragraph 3(2), becomes payable (see FLM35.04). On such an occasion the major lump sum is brought into account in order to recapture any statutory allowance for capital expenditure on the leased asset concerned. Since such allowances cannot be given on more than the cost of the asset there are rules in Paragraph 11 to ensure that any excess of the major lump sum over the cost of the leased asset qualifying for allowances is left out of account.

In general, no further rules are needed to ensure that the same sums are not brought into account twice - for example, once under 'negative depreciation' (FLM32.18) effectively charged to tax under Paragraph 5 of Schedule 12 and once under the disposal adjustment rules for capital allowances, as extended by Paragraph 11 Schedule 12. This is because there is no overlap between the sums involved. 'Negative depreciation' is reflected in the proceeds obtained from the disposal of a leased asset in excess of the lessor's original investment in that asset. That excess is excluded from the disposal proceeds taken into account for capital allowances.