»Ê¹ÚÌåÓýapp

This manual is being updated to reflect FRS 102 (2024 amendments). For guidance on the tax treatment of accounts prepared under IFRS 16 or the revised FRS 102, please refer to pages within the BLM50000 chapter.

Finance leases (and some operating leases) are commercially very similar to loans and yet prior to FA 2006 the tax treatments were very different. This meant that in some cases commercial decisions - whether to borrow or lease - were affected by the tax treatment of the transaction. That is, some commercial decisions were distorted as a result of the tax regime.

»Ê¹ÚÌåÓýapp rules introduced by FA 2006 reduce this distortion by taxing longer leases that function as financing transactions (‘long funding leasesâ€�) by reference to their commercial substance rather than their legal form. In short, and in very broad terms, the rules introduced by FA 2006 tax such leases in a similar way to a loan, though they are not loans and so are not taxed as loans under the loan relationship rules.

In broad terms, the long funding lease rules apply to leases entered into on or after 1 April 2006. »Ê¹ÚÌåÓýappre are exceptions to this rule with the result that the long funding lease rules

• do not apply to some leases entered into on or after 1 April 2006
• do apply to some leases entered into before 1 April 2006.

Lessors may elect for leases to be treated as long funding leases, see BLM24000.

At the same time as the long funding lease rules were introduced the rules which restricted the capital allowances available to lessors who leased plant or machinery to overseas lessees were phased out, see CA24005. Thus where lessors are entitled to capital allowances because the lease is not a long funding lease, they will not lose that entitlement where the lessee is overseas.

»Ê¹ÚÌåÓýapp changes introduced by FA 2006 represent a major change in tax treatment but they only reduce, rather than eliminate, distortion. »Ê¹ÚÌåÓýapprefore their effect on the behaviour of lessors and lessees is being monitored by BAI as part of the normal processes following the introduction of new legislation. See, in particular, BLM31010.