Taxation (International and Other Provisions) Act 2010 Schedule 3 Part 1

Leasing arrangements: finance leases and loans (Part 11A of ITA 2007)

Schedule 3 Part 1 (paragraphs 1–5) inserts a new Part 11A into the Income Tax Act 2007, establishing a comprehensive regime for taxing lessors on the accounting return from finance lease arrangements rather than on the contractual rent alone, and for clawing back capital allowances when a major lump sum is paid.

• Where a leasing arrangement is treated under generally accepted accounting practice as a finance lease or loan and the return on investment is partly disguised as a non-rent capital sum, the lessor is taxed on the higher of the normal rent and the "accountancy rental earnings" — the gross return on investment recognised in the accounts of the lessor, a connected person, or consolidated group accounts (Chapter 2 applies where there is a "major lump sum" element, and Chapter 3 catches other finance leases that do not meet all the Chapter 2 conditions).
• A cumulative balancing mechanism tracks the excess of accountancy rental earnings over normal rent (and vice versa) across accounting periods, so that in periods where normal rent exceeds accountancy rental earnings, the lessor's taxable rent is reduced by prior cumulative excesses — ensuring overall taxation broadly matches the total accounting return, with adjustments for bad debts and subsequent recoveries.
• When a major lump sum actually falls due, capital expenditure reliefs previously given to the lessor (or a contributor to expenditure) on the leased asset — whether plant and machinery allowances, mineral extraction allowances, patent allowances, or deductions for waste disposal, cemeteries, or film and sound recording expenditure — are clawed back by bringing in a disposal value or balancing charge equal to the lump sum (subject to applicable caps).
• The rules apply from 26 November 1996, with transitional provisions for pre-existing schemes; they do not apply to long funding leases within Chapter 6A of Part 2 of CAA 2001; and on a no-gain/no-loss assignment of the lessor's interest, the cumulative rental excesses pass to the assignee so the balancing mechanism continues seamlessly.

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