CFM97830 – Corporate Finance Manual – HMRC Internal Manual

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TIOPA10 / S460 (1) (c) – (d)

The corporate interest restriction rules contain specific provisions to deal with cases where a finance lease is not a long-term finance lease.

Accounting treatment

Accounting standards require companies to treat rents under a {finance lease} as if they contained “interest” and “capital” elements

The lessee will indicate in his income statement:

  • the “interest” element of leasehold rents, and;
  • depreciation of the leased asset over the shorter of the lease term and the expected useful life of the asset, taking into account the expected value of the asset at the end of the lease term.

The lessor will only indicate in its income statement the “interest” part of the rental rents. The capital element of the lease receipts will be recorded as a reduction of the finance lease receivable.

Tax treatment

When a finance lease is not a {long-term finance lease}, the lessor-lender is considered, for tax purposes, to have leased the asset to the lessee for a rental fee. Consequently, the gross rents due under a finance lease are considered as tax revenue.

For the lessor, it therefore includes all of the rental income (including the capital element carried on the balance sheet) as taxable income for the period.

For the lessee, the depreciation expense of the leased property is not added in the calculation of the tax. Globally, the total of “interest” and depreciation must correspond to the rents paid, less any reimbursement of rents to be received on termination of the lease.

More information on the taxation of finance leases that are not long-term financing is available on BLM32200.

Tax adjustment-EBITDA

TIOPA10 / S460 excludes each of the following when calculating a company’s adjusted corporate income tax profits when determining a company’s fiscal EBITDA:

  • the capital component of the company’s rental income under a finance lease that is not a long-term finance lease;
  • the amount of the depreciation of any property leased to the company under a finance lease that is not a long-term finance lease.

Therefore, these amounts should not be taken into account when calculating the total taxable profit for the period to determine the fiscal EBITDA of a company.

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