Finance Leasing Manual - FLM36.07

Lease changes: 'new' operating lease becomes a finance lease

Where a 'new' lease initially treated as an operating lease is reclassified as a finance lease (or loan), whether because its terms change or because accountants change their view of it, the rules in Schedule 12 (Part I or Part II as the case may be) apply from that point. For the reasons set out in the next paragraph no 'cumulative excesses' (see FLM33.01) are brought forward from earlier periods when the lease was classified as an operating lease.

No 'cumulative excesses' are brought forward from earlier periods because, by definition, 'accountancy rental earnings' cannot be derived from an operating lease. The underlying definition of 'rental earnings' is the income derived from what accountants regard as a finance lease or loan. By virtue of Paragraph 6(1) Schedule 12 FA 1997 a normal rental excess can only arise in a period of account in which a lease is classified as a finance lease (or loan).