What does section 377A of the Corporation Tax Act 2010 do?

Section 377A adjusts the corporation tax deduction for a lessee under a long funding finance lease accounted for as a right-of-use lease under IFRS 16. When amounts payable under the lease change during a period of account, the section increases or decreases the tax deduction after the section 377 cap to reflect the accounting impact of that change.

When does section 377A apply to a change in lease payments?

Section 377A applies when a change in lease payments results in either a remeasurement of the lease liability in the company's accounts or an accounting deduction that is not classified as lease interest, depreciation, or impairment of the right-of-use asset. The change must produce an entry falling outside normal ongoing lease charges.

How does section 377A interact with capital allowances under section 70D of the Capital Allowances Act 2001?

If the remeasurement or deduction arising from changed lease payments results in additional qualifying capital expenditure under section 70D of the Capital Allowances Act 2001, no adjustment is made under section 377A. This prevents a double benefit, as the company obtains tax relief through capital allowances on the additional expenditure instead.

Can section 377A both increase and decrease a lessee's tax deduction?

Yes. If lease payments increase and the accounts reflect a higher charge, the tax deduction after the section 377 cap is increased accordingly. Conversely, if lease payments decrease, the tax deduction is reduced. The aim is to ensure the deduction tracks the commercial impact of the rental change as shown in the profit and loss account.

Corporation Tax Act 2010 section 377A

Lessee under long funding finance leases: right-of-use leases

Section 377A adjusts the corporation tax deduction available to a lessee under a long funding finance lease accounted for under IFRS 16, where there is a change in the amounts payable under the lease during a period of account.

The section applies where a company is a lessee of plant or machinery under a right-of-use long funding finance lease and the amounts payable under the lease change during a period of account.
The change must result in either a remeasurement of the lease liability in the company's accounts, or a deduction that is not classified as lease interest, depreciation or impairment of the right-of-use asset.
Where the section applies, the tax deduction for lease payments (after applying the section 377 cap) is increased or decreased to reflect how the change in rentals is recognised in the accounts.
No adjustment is made if the remeasurement or deduction instead gives rise to additional qualifying capital expenditure under section 70D of the Capital Allowances Act 2001.

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