HMRC has published a policy document ‘Income Tax and Corporation Tax: response to accounting changes for leasing’ together with a response to it’s consultation ‘Corporate Interest Restriction: Tax response to accounting changes for leasing’.

A number of the tax rules depend on the Classification of leases into operating leases and finance leases. Under the new lease accounting standard, IFRS16, a business will not need to make this distinction in respect of leases where it is the lessee.

The Consultation set out three options for legislative changes required to ensure the Corporate Interest Restriction (CIR) rules continue to work as intended following the introduction of IFRS16, as well as asking for comments on how any transitional rules should work.

Draft legislation is included in Finance Bill 2019 which proposes that companies adopting IFRS16 or the equivalent FRS101:

  • Require the lessee to spread any transitional adjustment recognised upon adoption of IFRS16 over the average remaining length of leases which have given rise to the adjustment.
  • Keep the distinction between operating leases and finance leases for CIR purposes but with modifications:
    • The definition of a finance lease will be amended in the CIR rules, which will require an IFRS16 lessee to classify their leases between operating and finance leases for CIR purposes.
    • The rules for identifying a hire purchase contract for capital allowances claims will be amended to require an IFRS16 lessee to identify whether the contract would be accounted for as a finance lease.

The proposed changes will apply for accounting periods beginning on or after 1 January 2019.

Comments on the draft legislation are invited and should be emailed to: This email address is being protected from spambots. You need JavaScript enabled to view it. by 31 August 2018.

Respondents to the consultation:

  • Agreed with the proposed approach to maintain the current position with a suggested modification: that the onus be put on the lessee to classify the lease instead of the lessee having to ascertain the accounting treatment adopted by the lessor, which was what the government had originally suggested.
  • Rejected the simpler approach of following the accounting as it could lead to too many different tax treatments.


Leases: Plant and machinery 

Corporate Interest Restriction

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