Finance Leasing Manual - FLM43.02

Finance lessors: bad debts deduction

A deduction should only be allowed in computing the lessor's Schedule D Case I profits to the extent that rentals already recognised as trading receipts for tax purposes are bad or doubtful, applying the general tests in Section 74(1)(j) ICTA 1988 (see IM635). No deduction should be given to the extent that the write off in the accounts represents rentals which have not been recognised as a taxable trading receipt.

In particular you should never accept the contention that since the finance lease is in essence a loan, sums written off the 'loan' in the finance lessor's balance sheet should be deductible as they would be for its parent bank. For tax purposes the transaction is viewed as the hiring out of a capital asset, not the making of a loan. The extent to which the finance lessor will never recover its outlay on the leased asset will normally be reflected in its capital allowances computation. To give relief in the Schedule D Case I computation would effectively amount to a 'double allowance'.