BIM41125 - Specific receipts: reverse premiums: timing of the receipt: the normal case

A reverse premium received is normally taxed in accordance with the accountancy treatment.

Having simply prescribed that a reverse premium is a revenue receipt, the legislation leaves the time when the receipt must be brought into account in computing trade or property business profits to be governed by generally accepted accounting practice in the normal case. Unless avoidance is involved, a reverse premium will usually be brought to account for tax purposes as it is credited in the accounts. The avoidance case is considered in BIM41130.

Note this does not necessarily mean you are obliged to accept the spread of the receipt actually adopted in the accounts. The timing of the receipt for tax purposes must reflect generally accepted accounting practice.

Reverse premiums should be accounted for in accordance with FRS 102 Section 20 Leases. FRS 102 requires the receipt to be spread on a straight line basis over the term of the lease.

Relevant standards under other frameworks are:

FRS 105 Section 15 Leases.

IAS: IFRS 16 Leases (from 1 January 2019); SIC 15 Operating Leases – Incentives. IFRS 16 requires a lessee to include lease incentives in the measurement of both the right-of-use asset and the lease liability, which is spread over the life of the lease using the amortised cost method. SIC 15 required the receipt to be spread on a straight line basis over the term of the lease and is superseded by IFRS 16.

Old UK GAAP: UITF 28 Operating Lease Incentives . UITF 28 required the receipt to be spread on a straight line basis over either the term of the lease, or to the date of the first rent review expected to adjust the rent to prevailing market rate, whichever comes first.

Thus, there will be no need to adjust the commercial profit shown in the accounts unless either there is reason to believe generally accepted accounting practice has not been followed, or the anti-avoidance rule in BIM41130 applies.

For more about the relationship between tax and accountancy see BIM31000 onwards

If you have concerns regarding the accounting treatment of reverse premiums, seek advice from an HMRC Advisory Accountant.