Taxation of leased assets: the new HMRC discussion document

Taxation of leased assets: the new HMRC discussion

The discussion document sets out HMRC’s proposals to change the UK tax treatment of leased plant and machinery.

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On 9 August HMRC published a discussion document “Lease Accounting Changes: Tax Response”. It outlines their current thinking on options to change the UK tax treatment of leased plant and machinery. The catalyst is a need to ensure the tax rules in this area remain fit for purpose after the adoption of IFRS 16. At this stage HMRC are suggesting two main alternative approaches. Either the main features of the current regime will be retained, with only necessary changes, or alternatively a new regime will move to an accounts-based system, with variants which could maintain the ability to incentivise lessees. HMRC have not yet concluded on a preferred route. Taxpayers and advisers therefore now have an opportunity to submit their views and comments to HMRC over a 12-week period of consultation, ending on 30 October 2016.

The new accounting standard, IFRS 16 Leases (IFRS 16), will be effective from 1 January 2019 for many large UK companies which adopt International Financial Reporting Standards. For lessees, the effect of this new accounting standard is that the concept of an ‘operating’ lease will no longer exist. Instead lessees will be required to record each contract defined as a lease under IFRS 16, as a financial liability and a right of use asset (there are exceptions from this rule (i) for leases of 12 months or less and (ii) for low value assets which the International Accounting Standards Board (IASB) suggests are those under a threshold of $5,000).

For tax purposes, section 53 Finance Act 2011 deems lease accounting changes occurring on or after 1 January 2011 not to have effect. Absent any other law changes, when IFRS 16 comes into force this tax provision will apply. It is however generally recognised that it does not provide a satisfactory long-term solution. It requires affected companies to maintain two separate sets of accounting records. This could be onerous as it will not merely be a matter of retaining ‘finance lease’ and ‘operating lease’ labels for leased assets but also will necessitate different recognition of lease rental income and expense.

Hence it is good news that HMRC is grasping the nettle of a necessary change in time for the arrival of IFRS 16. In our detailed note we reflect on some of the key questions. This is an early stage and we recognise all the design features of a new regime are not yet present in the proposals HMRC have outlined.



For further information please contact :

Michael Everett

Peter Casey


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