Capital Allowances Act 2001 section 70O

The lease payments test

Section 70O sets out the lease payments test, which determines whether a lease of plant or machinery is a long funding lease based on the relationship between the present value of minimum lease payments and the fair value of the asset.

• A lease meets the test if the present value of the minimum lease payments equals or exceeds 80% of the fair value of the leased plant or machinery
• Fair value is the market value of the plant or machinery less any grants receivable towards its purchase or use
• The present value calculation uses the interest rate implicit in the lease, or if that cannot be determined, the incremental borrowing rate as defined for accounting purposes
• The Treasury has the power to amend this section by regulations to replace references to the incremental borrowing rate with another rate