BLM32020 | Taxation of leases that are not long funding leases: finance lessees: general issues: lease classification - tax effect

If the terms of the agreement appear inconsistent with the accounting classification it may be worth considering if different classification would

• affect whether anti-avoidance rules which apply to finance leases should be applied

• turn the lease into a long funding lease

• materially affect the recognition of rental payments for tax.

If the difference is material you may want to ask what consideration was given to lease classification in drawing up the accounts.

A great deal of time and effort is expended by lessors, lessees and their advisers in designing leases that are (just) properly accounted for as operating leases but which minimise the lessor’s exposure to risk. This may be only to keep the asset off the lessee’s balance sheet but consideration should be given as to whether it is also, or only, to side-step anti-avoidance rules that apply only to finance leases.

You should consult your advisory accountant at an early stage of any such enquiries and before you express a formal opinion.