BLM32360 - Taxation of leases that are not long funding leases: finance lessees: termination adjustments: example
This example shows the computational adjustments needed on termination where GAAP has not been applied in preparing the lessee’s accounts (see BLM32335). The facts are that
- an asset cost £10,000,
- its estimated useful life is 6 years,
- the finance lease rentals are £4,000 pa in arrear over a primary period of 3 years and nominal thereafter,
- the asset is sold at end of year 4 for £5,000 and proceeds paid to lessee as rental rebate,
- accounting treatment of rentals: SSAP 21 not followed; rentals charged against profits of the primary period at £4,000 pa,
- accounting treatment of rebate: rental rebate of £5,000 credited in year 4,
- tax treatment of rentals: it has been agreed that rentals are spread evenly over useful life of asset (6 years), so the trader is given deductions of £2,000 a year for each of the three years by the time the asset is sold.
The tax treatment of the rebate of £5,000 in the example above differs from the accountancy treatment. Instead of treating the rebate of £5,000 as a taxable receipt, a further deduction for rentals of £1,000 is due calculated as follows:
Rentals paid: 3 x £4,000 = | £12,000 |
---|---|
Rebate: | £(5,000) |
Net outgoing | £7,000 |
Tax deductions given so far: 3 x £2,000 = | £6,000 |
Further deduction due is | £1,000 |
To give total deductions of | £7,000 |