BLM30050 - Taxation of leases that are not long funding leases: tax advantages: examples comparing taxable profits of the parties, part 3 of 3

In Example 1 at BLM30040:

• the bank’s taxable profit is the same as the commercial profit - the bank is liable on the interest receivable less expenses payable, including its own interest costs. The taxable profit on the illustrative figures is therefore the commercial profit of £20.
• the tax-paying borrower gets a deduction for the interest payable; it also gets capital allowances on the capital cost of the machine of £1,000 which, at the end of the day, will equal the net loss suffered (that is, the cost less sale or scrap proceeds). So, on the figures in the example, the borrower’s tax deductions amount to £1,200 (being £200 interest and £1,000 of capital allowances). This is the same as the commercial accounts.

In Example 2 at BLM30040:

• The finance lessor is liable to tax on its gross rentals (‘interest’ plus ‘loan repayment’) less capital allowances, which are equal to the net capital cost of the kit, and, as before, less expenses, including the lessor’s own interest costs. Thus, after capital allowances, the lessor is taxed on his ‘interest’ turn, just like the bank. The lessor’s taxable profit is therefore also £20 (being gross rentals of £1,200 less expenses of £180 and capital allowances of £1,000).
• the tax-paying lessee gets a deduction for the rentals paid (‘loan repayment’ plus ‘interest’) but no capital allowances. The lessee’s tax deductions will be the same as the borrower’s - a total of £1,200 (being £200 ‘interest’ and £1,000 depreciation).

Overall, the figures for lender and borrower in Examples 1 and 2 at BLM30040 are the same as for lessor and lessee, assuming an investment in similar kit at the same price and with the same payment terms. But see BLM30200 onwards which outlines some of the additional complications of real life.