SolvedBLM30210 | Taxation of leases that are not long funding leases: How tax advantages arise: timing differences - finance lessor, a worked example, part 2 of 4
From HM Revenue & Customs · Business Leasing Manual
In the example in BLM30040 the finance lessor is taxable (like the bank) on a profit of £20 at the end of the day, but the 25% capital allowances of £250 due to the lessor in Year 1 will create an upfront tax loss of £76. This is on a simplified calculation which assumes:
the total rentals of £1,200 are split evenly between the years
the ‘interest’ in and out is front-loaded
the ‘other expenses’ are slightly front-loaded
the asset is purchased at the start of Year 1.
This produces the following computation for the finance lessor for Year 1:
| Entry | Amount |
|---|---|
| Gross rents receivable (£1,200 ÷ 5) | £240 |
| Less interest payable | £58 |
| Gross profit | £182 |
| Less other expenses | £8 |
| Net profit | £174 |
| Less capital allowances | £250 |
| Tax loss | (£76) |
The loss is recovered later and the overall profit of £20 is taxed, as the following tax computations for the finance lessor for the whole five years shows:
| Year 1 | Year 2 | Year 3 | Year 4 | Year 5 | Totals | |
|---|---|---|---|---|---|---|
| Gross rent | 240 | 240 | 240 | 240 | 240 | 1,200 |
| Less interest payable | 58 | 45 | 32 | 19 | 6 | 160 |
| Gross profit | 182 | 195 | 208 | 221 | 234 | 1,040 |
| Less other expenses | 8 | 4 | 4 | 4 | 0 | 20 |
| Net profit | 174 | 191 | 204 | 217 | 234 | 1,020 |
| Less WDA and BA | 250 | 188 | 141 | 105 | 317 | 1,000 |
| Taxable profit (loss) | (76) | 4 | 64 | 112 | (83) | 20 |
The capital allowances for Year 5 assume a short-life election has been made and a balancing allowance is due on the worthless asset, thereby relieving the entire net cost over the 5 years.
With longer leases there are likely to be tax losses in the first few years. For example if the lease is over a 25-year term there could be tax losses in the first 6 or 7 years. Tax losses may be generated for longer periods by structuring the payment profile appropriately. The longer the period of losses, and the greater the delay in recovering the tax, the greater the timing advantage.