Finance Leasing Manual - FLM43.09

Bad debts example: debts become bad in first year

The 'failure' might typically take one of two forms:

• the lessee might become insolvent - see FLM43.10;

• the lessee may disappear along with the leased assets - see FLM43.11.

The common feature of both types of failure is that, because the failure occurs during the first year, the lessor has not been taxed on any rentals from this transaction in contrast to a trader who has sold goods and credited the debt in computing his taxable profits. The lessor's only outlay is the cost of the underlying asset (£50,000 in the example at FLM43.04) that is relieved by way of Capital Allowances, and other costs which, if revenue, will be deductible in computing the lessor's Schedule D Case I profits.