BLM51025 - Right-of-use assets: right-of-use asset lessees: taxation of right-of-use asset 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 would account for the lease as a finance lease under GAAP compliant accounts if they were required to do so.  However, leases reported in accounts prepared under IFRS 16 and FRS 102 (2024 amendments), which refer instead to right-of-use assets, cannot meet the finance lease test.  

As some tax statute still requires users to distinguish between finance and operating 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, had they prepared their accounts under FRS 102 (prior to the 2024 amendments), FRS 105 or IAS 17.  

The following legislation was amended to include the updated test: 

  • hire purchase rule (section 67 CAA 2001)

  • sub-operating leases (section 228J CAA 2001) 

  • structured finance arrangement provisions (section 809BZN ITA 2007 and section 771 CTA 2010) 

  • 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) 

  • meaning of ‘property profits’ and ‘property financing costs’ (S544 CTA 2010) 

  • corporate interest restriction (S494 TIOPA 2010) 

Normally, it would be clear when a lease would have been a finance lease under FRS 102 (prior to the 2024 amendments), FRS 105 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 (FRS 102 20.6c) 

  • specific terms in the lease contract determining that a high percentage of the sale proceeds of the underlying asset will be reimbursed 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. 

Revised guidance on the corporate interest restriction for right-of-use asset lessees is in CFM97810.