BLM20125 | Defining long funding leases: basic definition: rules applying to lessees - example

Example

Two lessees, A Ltd and B Ltd, enter into identical full pay-out finance leases on 1 June 2007. Rentals are £10,000 per year for 10 years. The net present value (NPV) of the rentals is £70,000.

Both companies have an accounting year end of 31 December.

A Ltd submits its return for the year to 31 December 2007 on 1 December 2008. The tax computation makes it clear that the company is claiming a deduction for the capital element of the lease rentals. The lease is therefore not a long funding lease.

B Ltd also submits its return for the year to 31 December 2007 on 1 December 2008. It claims capital allowances on £70,000 and a deduction for only the finance charge element of the lease rentals (that is the depreciation of the asset is added back in the computations). The lease is therefore a long funding lease.

If A Ltd were to amend its return by 31 December 2009 (perhaps later if an enquiry was made) it could claim capital allowances and treat the lease as a long funding lease. B Ltd could also change the tax treatment of its lease if it amended its return.