Revenue Note for Guidance

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Revenue Note for Guidance

76D Computation of income from finance leases

Summary

Section 76D clarifies and codifies the current tax treatment of lease payments.

Under section 76A, trading income of a company is based on the accounts of the company prepared in accordance with accounting standards, subject to any adjustment required or authorised by law. Accounting standards for leases can often involve applying substance over form and, in effect, accounting for leases as if they were financing transactions – this results in significant levels of adjustment often being required.

Section 76D sets out how lease income and expenses should be computed for tax purposes in scenarios where the accounting treatment is likely to deviate substantively from the legal form. These deviations are more likely in the case of finance lessors, and lessees more generally following the introduction and commencement of IFRS 16.

The section confirms that in the case of any lease transaction:

  • the income from a lease, in the case of a lessor, and
  • the lease rental payments, in the case of a lessee,

should generally be recorded evenly over the life of the lease in line with the legal form of the transaction, except where sections 80A and 299 apply.

Prior to Finance Act (No.2) 2023, this section confirmed this point in respect of finance lessors only.

Details

Definitions

(1) Subsection (1) inserts necessary definitions for the functionality of the section.

Prior to Finance Act (No.2) 2023, some of these were previously included in section 299, but have been moved to create a central location for general leasing terminology in the Act.

“finance lease” means a lease which, under Generally Accepted Accounting Practice, falls to be treated as a finance lease;

“lease” means to either a finance lease or an operating lease;

“leased asset” refers to the asset that is the subject of the lease;

“lease payments” refers to the amounts payable under the lease to the lessor, including amounts prepaid. This definition explicitly includes:

  1. residual amounts payable to the lessor at, or after, the end of the lease term and guaranteed by either:
    • the lessee,
    • a person connected with the lessee, or
    • under the terms of any scheme or arrangement between the lessee and any other person, and
  2. any amount refundable by the lessor at, or after, the end of the lease term and guaranteed by either:
    • the lessor,
    • a person connected with the lessor, or
    • under the terms of any scheme or arrangement between the lessor and any other person.

“lease term” takes its meaning from Generally Accepted Accounting Practice;

“lessee” and “lessor” in relation to machinery or plant provided for leasing, respectively refer to:

  • the person to whom the machinery or plant is or is to be leased, and
  • the person providing the machinery or plant for leasing.

The terms ‘lessee’ and ‘lessor’ also respectively include the successors in title of a lessee or a lessor;

“operating lease” refers to a lease which, under Generally Accepted Accounting Practice, does not fall to be treated as a finance lease.

Computation of income by finance lessors

(2) Subsection (2) confirms that, for the purposes of calculating income of company from a finance leasing trade:

  • the accounting treatment provided for in section 76A does not apply, and
  • the lease income is to be recorded evenly over the length of the lease,

in line with the legal form of the agreement.

Computation of lease payment expenses by lessees

(3) Subsection (3) confirms that lease payments payable by both operating and finance lessees should be recorded evenly over the length of the lease, in line with the legal form of the agreement.

Change to lease during lease term

(4)(a) If there is a change to the conditions of the lease during its life, then the amount to be taxed or deducted should be recalculated (with the difference being spread evenly over the remaining life of the lease).

(4)(b) Where the change arises from a fact or matter arising that could not be reasonably foreseen/estimated at the time of commencement, the difference should be spread over the period, or periods, to which that change relates.

Treatment of rebates

(5) If a lessee receives a rebate at the end of the lease then that rebate (by virtue of being a refund of a lease payment) is:

  • deductible in the hands of the lessor on the later of when it is paid or accrued, and
  • taxable in the hands of the lessee on the earlier of when it is received or accrued.

The requirement for ‘the later of’ and ‘the earlier of’ is an anti-avoidance measure to prevent a lessor taking a tax deduction for the rebate before it is paid and taxable in the hands of the lessee.

However, if the lease rebate by the lessor (or a person connected with the lessor) is certain from the inception of the lease, then it will form part of the lease payments and should be spread over the life of the lease in the manner set out in subsection (3). Equally, if there is a residual amount to be paid to the lessor at the end of the lease by the lessee or a person connected with the lessee, and this is certain from the inception of the lease, it will form part of the lease payments at inception.

Relevant Date: Finance Act 2024