BLM51010 | Right-of-use assets: taxation of right-of-use assets: particular taxation issues for right-of-use asset lessees

Lease rentals, unless there are exceptional terms to the lease, will be on revenue account. GAAP-compliant accounts provide the basis for recognising the rental tax deduction as explained in BLM51005. Care though should be taken when reviewing the deduction claimed by a right-of-use asset lessee because some of the depreciation charge recognised on the right-of-use asset may be a capital cost. Care will be needed when reviewing depreciation of right-of-use leases where it is a property lease.

The initial measurement of a right-of-use asset includes:

• the initial measurement of the lease liability. (This amount will represent part of the actual rentals payable)

• any lease payments made to the lessor before the commencement of the lease less any lease incentives received (this could include, for example, payments received by the lessee to enter into the lease, a lease incentive)

• any initial direct costs incurred by the lessee (lease premiums, any stamp taxes, and any costs paid to a previous lessee, for example to terminate the lease early)

• any estimated costs that could be incurred by the lessee at the end of the lease required under the lease terms (restoring a property to its original condition, returning the asset to the lessor)

• for FRS 102 only, any amount recognised in the initial measurement when a lease component contains a government grant or similar

Some of the costs capitalised in the right-of-use asset may well therefore be capital costs which should be added back to profits for tax purposes. Practically, this will mean that part of the depreciation of the right-of-use asset should be added back as and when it is recognised in the profit and loss account. Attempts to delay any add back until the actual costs are paid should be resisted.

An example of adjustments that may arise from taking the right-of-use asset as a proxy for the rentals is given in BLM51015.