HMRC is consulting on options for changes to the tax treatment of leases of plant and machinery in response to the International Accounting Standards Board’s new lease accounting standard (IFRS 16).
HMRC is consulting on options for changes to the tax treatment of leases of plant and machinery in response to the International Accounting Standards Board’s new lease accounting standard (IFRS 16). For those companies which use international financial reporting standards, or report under FRS 101, the new standard will have effect for periods of account beginning on or after 1 January 2019. Companies using UK GAAP will not be affected.
The new standard undoes the link between the accounting and tax treatment, which exists under the long funding lease regime. Under IFRS 16, lessees will use only one form of accounting and so, unlike lessors, will no longer classify their leases as being ‘finance’ or ‘operating’ leases.
All lessees will record at the outset a ‘right of use’ asset and a liability to pay rentals under the lease. Both are valued at commencement of the lease by reference to the present value of the payments under the lease. The ‘right of use’ asset is depreciated on a straight line basis. The finance charge element of the rental is recognised so as to maintain a constant rate on the outstanding liability. Costs therefore reflect the finance charge element of the rentals and the depreciation of the right to use the asset. There are exceptions for short life and low value assets.
The consultation sets out a number of possible options for changes to the rules on lease taxation, ranging from adaptations to preserve the effect of the current regime, to a whole new regime for the tax treatment of plant and machinery leases. These are:
· Option 1 (status quo): involves capital allowances still being available to lessors, except under long funding leases;
· Option 2 (accounts-based regime): would replace current access to capital allowances with accounting depreciation for all leased assets;
· Option 3 (accounts-based with leasing allowance): new tax regime based on the accounting entries but providing an option to the lessee to claim enhanced or accelerated relief, based on the value of the right to use the leased asset;
· Option 4 (accounts-based with capital allowances): new tax regime based on the accounting entries, but providing an option for the lessee to claim capital allowances based on the value of the right to use the leased asset.
None of these options would change the total amount brought into charge to tax for a lessor or the amount of relief available to a lessee, but options 2, 3 and 4 could affect the timing of the charge and relief.
HMRC is consulting on options for changes to the tax treatment of leases of plant and machinery in response to the International Accounting Standards Board’s new lease accounting standard (IFRS 16).
HMRC is consulting on options for changes to the tax treatment of leases of plant and machinery in response to the International Accounting Standards Board’s new lease accounting standard (IFRS 16). For those companies which use international financial reporting standards, or report under FRS 101, the new standard will have effect for periods of account beginning on or after 1 January 2019. Companies using UK GAAP will not be affected.
The new standard undoes the link between the accounting and tax treatment, which exists under the long funding lease regime. Under IFRS 16, lessees will use only one form of accounting and so, unlike lessors, will no longer classify their leases as being ‘finance’ or ‘operating’ leases.
All lessees will record at the outset a ‘right of use’ asset and a liability to pay rentals under the lease. Both are valued at commencement of the lease by reference to the present value of the payments under the lease. The ‘right of use’ asset is depreciated on a straight line basis. The finance charge element of the rental is recognised so as to maintain a constant rate on the outstanding liability. Costs therefore reflect the finance charge element of the rentals and the depreciation of the right to use the asset. There are exceptions for short life and low value assets.
The consultation sets out a number of possible options for changes to the rules on lease taxation, ranging from adaptations to preserve the effect of the current regime, to a whole new regime for the tax treatment of plant and machinery leases. These are:
· Option 1 (status quo): involves capital allowances still being available to lessors, except under long funding leases;
· Option 2 (accounts-based regime): would replace current access to capital allowances with accounting depreciation for all leased assets;
· Option 3 (accounts-based with leasing allowance): new tax regime based on the accounting entries but providing an option to the lessee to claim enhanced or accelerated relief, based on the value of the right to use the leased asset;
· Option 4 (accounts-based with capital allowances): new tax regime based on the accounting entries, but providing an option for the lessee to claim capital allowances based on the value of the right to use the leased asset.
None of these options would change the total amount brought into charge to tax for a lessor or the amount of relief available to a lessee, but options 2, 3 and 4 could affect the timing of the charge and relief.
