BLM00530 - Introduction: Lease taxation: Lease not Long Funding Lease (LFL): Finance lessors (outline)
This manual is being updated to reflect FRS 102 (2024 amendments). For guidance on the tax treatment of accounts prepared under IFRS 16 or the revised FRS 102, please refer to pages within the BLM50000 chapter.
As explained at BLM00525, a finance lessor is taxed on all the rental income it receives even though only the ‘interest’ element is shown as income in the accounts.
As explained at BLM00215, what this manual refers to as the 'capital' element in the rentals is actually part of what are, for tax purposes, revenue earnings. The gross rentals are only split into 'interest' and 'capital' elements in an economic sense. Since the 'capital' element is a revenue receipt for the lessor it is necessary to establish the basis on which it should be recognised for tax purposes.
In broad terms the taxation of the rentals can be thought of as based on an accruals basis, with the rentals receivable in respect of particular period being taxed as income of that period. However, the detail is a little more complex than that, see BLM00535.