Finance Leasing Manual - FLM43.14

Failure during first year: where income returned

It might be argued that the finance charge is still taxable when it is earned under the terms of the lease, but that the whole of the bad debt charge should be relieved in year one. This is not acceptable for tax purposes. It may be sound accounting practice, but it ignores the underlying facts. At the time the accounts were drawn up it was known that the income was unlikely to be received.

If the lease is caught by Schedule 12 Finance Act 1997 (see FLM27.01) the position will be the same. As FLM34.01 explains, there is no need for a special relieving provision under Schedule 12 because this is provided for anyway under general bad debts rules. So in the example at FLM43.04 the position is:

Modified example