B5.404 The taxation treatment of leasing
This article relates to the taxation treatment of leases other than long funding leases of plant and machinery. For details on long funding leases, see B5.405–B5.409A. For details on the capital allowances treatment of leases, including long funding leases see B3.340A–B3.340ZB.
In the case of both the lessor and lessee under a hire-purchase contract, the profits computed in accordance with FRS 102 s 20 (SSAP 21 for accounting periods beginning before 1 January 2015) (see B5.403) should be followed for tax purposes1.
Except in the case of a long funding lease of plant or machinery (see B5.405–B5.409A), the tax treatment of rentals follows GAAP for both lessor and lessee2.
Lessees under IFRS 16
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 applying IFRS 16. IFRS 16 applies for periods of account beginning on or after 1 January 2019, although early adoption was allowed. On adoption of IFRS 16, the tax treatment of leases follows the amounts charged in the accounts with the interest expense charge and right-of-use asset depreciation charge generally being allowable deductions3. To the extent that any of the depreciation charge is capital (where the initial measurement of
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