B3.340Y Long funding leases of plant and machinery—the general rules
The legislation providing for the tax treatment of 'long funding leases' of plant and machinery was introduced by FA 2006 with the intention of ensuring that lease finance and loan finance are taxed in much the same way. It is therefore restricted to leases which are essentially financing transactions, comprising mainly finance leases but also some operating leases.
The most significant feature of this regime is that, provided certain conditions are met, capital allowances will be available to the lessee rather than, as would be the case on ordinary principles, the lessor. As a consequence the lessee's allowable deductions in computing profits are restricted to exclude any expenditure to the extent that it qualifies for allowances.
From 1 January 2019 IFRS 16 replaced IFRS 17, although a company could choose to apply IFRS 16 before that date but only if it also applied IFRS 15. Where a lessee applies IFRS 16 in their financial statements, there is no distinction between a finance lease and an operating lease, a lessee recognises all leases on their balance sheet as right-of-use assets and corresponding lease liabilities (apart from some exempted leases which are short or of low value). The distinction between operating and finance leases still applies for lessors. In order to maintain the tax treatment of finance leases and operating leases if IFRS 16 is adopted, FA 2019, s 36, Sch 14 amended various definitions which