The Spring Budget provides some clarity on the approach to be taken under IFRS16 but more detail is still required.
In August 2016 HMRC consulted on alternative ways to make UK tax rules fit for purpose following the introduction of International Financial Reporting Standard (IFRS) 16, the new lease accounting standard. For most IFRS lessees, from 2019 the operating lease concept will cease. All leased assets will be brought on balance sheet by the lessee as a right of use asset with an associated financial liability.
HMRC’s August 2016 document set out four possible ways of approaching this. Option 1 was to make only minimal necessary changes – this is now the chosen route. We have no detail yet of the changes which will be proposed and HMRC are to consult further on this in the summer 2017. There will be issues that need considering to ensure a smooth transition.
The issues arising from IFRS16 are not confined to plant and machinery: there is also likely to be an impact on the taxation of lessees of land and buildings. The extent to which HMRC will address this in the summer 2017 consultation is not known.
Finally, we note there will be interactions of IFRS16 with the UK’s corporate interest restriction rules, given that more leases than at present will comprise a (potentially disallowable) finance charge.
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