BLM51025 - IFRS 16 leases: IFRS 16 lessees: Taxation of IFRS 16 lessees: finance lease under old UK GAAP

Certain legislation has a finance lease test for a lessee. The lessee meets a finance lease test where they account for the lease as a finance lease under GAAP compliant accounts. For accounts beginning from the 1 January 2019 onwards only a lessee who uses FRS 102 will meet the finance lease test. Lessees who use either FRS 101 or IFRS 16 will recognise right-of-use leases.

Schedule 14 FA 2019 expanded the finance lease test for a lessee who has recognised a right-of-use asset to test whether they would have had a finance lease under FRS 102 or IAS 17.

The following legislation was amended in FA 2019 to include the updated test for whether a lessee using IFRS 16 would have had a finance lease under another accounting standard:

• Hire Purchase rule (section 67 CAA 2001).
• Structured Finance Arrangement provisions (section 809BZN ITA 2007 and section 771 CTA)
• Sale and leasebacks and calculation of the supplementary charge in the case of ring fence trades (section 288 CTA 2010 and section 331 CTA 2010)
• Sale of Lessors provisions (section 437 CTA 2010)

Normally it would be clear when a lease would have been a finance lease under FRS 102 or IAS 17 from the lease contract. Evidence would include:

• The lease being a full payout lease with a secondary lease period which has low rentals
• Specific terms in the lease contract determining that a high percentage of the sale proceeds of the underlying asset will be rebated to the lessee.

If after obtaining the facts you consider that the conclusion reached by the lessee is questionable you should refer the case to an advisory accountant before making any challenge to the taxpayer.

There were also various changes made to the Corporate Interest restriction rules. Guidance on the Corporate Interest Restriction for an IFRS 16 lessee is given in CFM97810.