IFRS 16 leases ― the tax implications

Produced by Tolley in association with Malcolm Greenbaum

The following Corporation Tax guidance note Produced by Tolley in association with Malcolm Greenbaum provides comprehensive and up to date tax information covering:

  • IFRS 16 leases ― the tax implications
  • Overview of IFRS 16
  • IFRS 16 ― implementation rules
  • Exclusions for certain types of leases
  • IFRS 16 ― timing of tax deductions
  • IFRS 16 ― transitional adjustments
  • Tax accounting implications of the transitional adjustment
  • IFRS 16 ― interaction with other tax provisions
  • Corporate interest restriction (CIR)
  • Tax impact of certain costs or receipts
  • More...

IFRS 16 leases ― the tax implications

Overview of IFRS 16

International Financial Reporting Standard 16 (IFRS 16) came into force for accounting periods beginning on or after 1 January 2019, replacing International Accounting Standard 17 (IAS 17). The adoption of IFRS 16 applies to all entities which apply International Financial Reporting Standards or Financial Reporting Standard 101 Reduced Disclosure Framework (FRS 101). Entities applying FRS 102 are excluded from the changes.

Prior to IFRS 16, lessees and lessors were required to make a distinction between finance and operating leases. Where the lessee had substantially all the risks and rewards incidental to the ownership of an asset, it had to recognise a finance lease asset and liability on its balance sheet. Where the lessee did not have substantially all the risks and rewards incidental to the ownership of the asset, it recognised lease payments as an expense over the lease term and was considered to have an operating lease. This treatment will continue under FRS 102. However, IFRS 16 removes the distinction between finance leases and operating leases for a lessee. Under IFRS 16, a lessee will recognise all leases, subject to some limited exceptions for short-term leases or those of low value (see below), on its balance sheet leading to a ‘right-of-use’ (ROU) asset and a lease liability for all leases. The treatment for lessors under IFRS 16 is broadly unchanged.

For tax purposes, changes in accounting standards for leases would normally be ignored as a result of the provisions in FA 2011, s 53. However, these were repealed from 1 January 2019, broadly allowing tax to follow the accounting treatment under IFRS 16 (rather than companies having to maintain two sets of books). Instead of an operating lease rental charge through the income statement which would have generally been tax deductible, there will be an interest expense charge and an ROU asset depreciation charge. Tax relief will generally be available for both of these.

While the

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