BLM51005 | Right-of-use assets: taxation of right-of-use asset lessees: taxation of short leases

Any right-of-use asset which does not meet the tests to be a long funding lease will be taxed as any other trading expense. In particular, the guidance on finance lessees in BLM32200 applies equally to right-of-use assets. Lease rentals are revenue expenditure, regardless of the accounting treatment, unless there are exceptional circumstances such as those described in BLM32230.

Where GAAP has been correctly applied then the accounting recognition in the profit and loss for the right-of-use asset and interest on the lease liability correctly accrues the lease rental costs. Practically this means that, in most cases, an amount equivalent to the yearly depreciation of the rental costs and the interest expense recognised on the lease liability is deductible in computing the taxable profits of that period. There is no change to the basic approach as was originally set out in SP3/91 and subsequently in BLM32210. There are exceptions to this based upon basic principles of taxation, such as whether any of the depreciation of the right-of-use asset is capital.