Finance Leasing Manual - FLM41.02

Grossing up: permanent tax benefits

In some circumstances the lessor may become entitled to permanent tax benefits (which he will often share with the lessee), as well as the tax effects of timing advantages (see FLM41.01). These permanent benefits, but not timing advantages, have often been accounted for by a process of 'grossing up'. That is by showing a standard rate tax charge in respect of the (actually tax-free) profit in question, and increasing the profit by that tax charge, so that the after-tax profit from the lease in unchanged.

Examples of permanent tax benefits are:

• the receipt of non-taxable government grants, like regional development grants, towards the cost of the leased asset;

• arrangements whereby the lessor obtains part of his 'interest' return in the form a capital sum against which capital losses and indexation relief can be set - these arrangements are normally now within Part I of Schedule 12 FA 1997.

In the latter case the grossing up adjustment will take the form of an increase in the 'negative depreciation' credit for the lease in question.