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Leased assets – tax changes in response to IFRS16

Leased assets – tax changes in response to IFRS16

HMRC have released two consultations on leasing tax changes.


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The introduction of IFRS16 will remove the operating/finance lease concept for lessees, which will impact the taxation of leased assets. On 1 December 2017, HMRC published two consultation documents, which focus mostly on amendments to the long funding leasing rules and transitional arrangements, with some comment on non-plant leases and other areas. HMRC’s stated wish is to ensure that the system continues to work broadly as it does currently.

The key principles behind the consultations are:

  • Non-long funding lessors will continue to be entitled to capital allowances on plant;
  • Long funding lease rules will continue to transfer capital allowances entitlement to lessees;
  • Lessors, and lessees who use FRS 102 (or FRS 105), will see very little change;
  • IFRS16 lessees of assets under non-long funding leases (whether plant or not) will follow Statement of Practice (SP) 3/91 principles of deduction; and
  • On corporate interest restriction, changes are suggested regarding lease rentals, however no decisions have been made in this area.

The current rules at s53 FA2011 disapply lease accounting changes occurring on or after 1 January 2011 for tax purposes. This would not have provided an ideal long-term solution as it would have required IFRS companies to maintain two separate sets of accounting records. HMRC propose to repeal it with effect from 1 January 2019 and replace it with more holistic reforms.

It has been decided to preserve a finance lease ‘gateway’ test based on the test in s70N CAA 2001. An IFRS16 lessee will still need to apply this test for various tax purposes:

  • If a lease transfers sufficient risks and rewards it will not necessarily be a long funding lease (the ‘not short’, lease rentals and economic life tests will still need to be considered); and
  • If a lease does not transfer sufficient risks and rewards, the lessee will continue to be treated as having an operating lease for some tax purposes and it will fall outside certain anti-avoidance rules targeted at finance leases.

By contrast, if an IFRS16 lease is a long funding lease, the lessee’s capital allowances and rental deductions will be calculated as if the lease were a finance lease. Furthermore, if a lease was a long funding operating lease pre IFRS16, becoming an IFRS16 lease will trigger s70YA CAA 2001, which will deem the lease to recommence and the quantum of allowances could change on transition. 

It is proposed to scrap Conditions A, B and C in s70I CAA 2001 and simply allow leases of seven years and under to be short. This is an example of simplification.

HMRC confirm that ‘SP 3/91’ treatment will be allowed to lessees under all IFRS16 leases, such as leases of property. It is recognised that this will mean that lessees’ profile of tax deductions will change – the straight lining of an operating lease rental over the lease term (or to the next rental review date) will give way to a depreciation deduction together with a finance deduction. This finance deduction is relatively ‘up fronted’ because the finance cost is calculated for each period by applying an implicit interest rate to an amortising lease debtor, like a mortgage. This may prove a challenge for non-depreciated assets.

With much of the detail still awaited, these changes in general appear to introduce more complexity in order to retain tax integrity in the face of diverging accounting.

The consultations can be found here: 

Plant and machinery lease accounting changes

Corporate interest restriction - consultation on leases

For further information please contact:

Michael Everett

Peter Casey

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