BLM00550 | Introduction: Lease taxation: Long funding leases of plant or machinery

This manual is being updated to reflect FRS 102 (2024 amendments). For guidance on the tax treatment of accounts prepared under IFRS 16 or the revised FRS 102, please refer to pages within the BLM50000 chapter.

Finance Act 2006 introduced a new regime for taxing what are known as long funding leases. In general terms these rules apply to leases entered into on or after 1 April 2006.

In broad terms, long funding leases are leases of plant or machinery which are

• finance leases with a term of more than 5 years (sometimes more than 7 years)

• operating leases with a term of more than 5 years which meet tests intended to identify those operating leases that serve a financing function.

In broad terms, long funding leases are taxed by reference to their commercial substance. Therefore

• long funding lessors are taxed in a similar way to which the way in which they would have been taxed had they made a loan. This is more obvious with finance leases than with operating leases

• long funding lessees are taxed in a way that is similar to the way in which they would be taxed had they purchased the asset. Again, this is more obvious with finance leases than with operating leases.

Therefore, where you have a lease of plant or machinery (including plant or machinery that is leased with land) it is necessary to establish whether the lease is a long funding lease or not. Guidance on this topic is at BLM20000 onwards.

Further guidance on the taxation of finance leases that are not long funding leases is at -

• BLM32000 for finance lessees

• BLM33000 for finance lessors.

Guidance on the taxation of long funding leases is at BLM40000 onwards.