HMRC have released a discussion document Lease Accounting Changes: Tax Response ahead of the upcoming changes to lease accounting . 

A new IFRS lease accounting standard, IFRS 16, comes into effect for accounting periods beginning on or after 1 January 2019.  Although this will affect both property and plant leasing the discussion document focuses on plant and machinery leasing only.

IFRS 16 does away with the distinction between operating and finance leases for lessees. As this concept is important for several areas of UK tax (in particular the long funding lease (LFL) rules) changes will be needed.

Businesses accounting under UK GAAP (other than FRS 101) will not be affected by these accounting changes.  Any changes to the tax system will therefore need to function for both sets of rules.

HMRC propose 4 options:

  1. Status quo: minimal changes to ensure that the current tax regime continues to function.
  2. Accounts based regime: a new tax regime based on accounting entries.
  3. Accounts based with leasing allowance: as per (2) but providing an option for the lessee to claim enhanced or accelerated relief.
  4. Accounts based with capital allowances: as per (2) but providing an option for the lessee to claim capital allowances.

None of these options are expected to alter the total amount of taxable income for the lessor or relief for the lessee, but (2), (3) and (4) could affect timing .

Comments are invited on the proposed options by 30 October 2016.  This will be followed by a further more detailed consultation on a specific proposal.


Our subscriber guide: Leases: plant and machinery

Link to consultation document: Lease Accounting Changes: Tax Response