Leasing- changes in Finance Bill 2018-19

Fri 17 Aug 2018

Finance Bill 2018-19 Sch8 sets out the changes proposed to take account of the introduction of IFRS16. In general lessees will need to account for operating leases as ‘right of use’ assets on the balance sheet with a corresponding liability. These changes apply to both companies and unincorporated businesses.  This note does not cover the changes affecting corporate interest restriction rules.

Changes affecting lessees

For periods of account beginning on or after 1 January 2019, the legislative provisions that rely on the distinction between different kinds of leases are revised. For lessors, there are no changes but for lessees, right of use leases which are, in effect, long funding operating leases in the existing nomenclature are to be classed as long funding finance leases.

Withdrawal of FA 2011 s53 (leases and changes to accounting standards)

In addition, FA 2011 s53 (which disregards accounting changes for the purposes of tax in relation to leases entered into on or after 1 January 2011) is repealed. The amounts taken to equity as a result of transition are to be spread over the remaining life of the leases.  The spreading looks at all leases of a business on transition and apportions the adjustment across the lease portfolio.  There is a helpful illustration of how this works on page 68 of the explanatory notes to the Finance Bill, or page 7 of the explanatory notes to the measure.

Lessees that have adopted IFRS16 accounting treatment early will be treated for transitional rule purposes in line with those who do not adopt early.

Where there is a transfer to a connected party, of a lease subject to the transitional spreading rules, and no tax avoidance purposes, the transferee is to continue to spread the adjustment – effectively taking over the spreading calculations from the transferor.

Significant changes to the definition of a finance lease in CAA 2001, CTA 2010 and ITTOIA 2005

• For the hire purchase provision (CAA 2001 s67), a right of use asset is treated as a finance lease if the entity is required to assess whether that was so under GAAP (for example ignoring IFRS16 for a lessee using international GAAP). Effectively, this preserves the status quo.
• For the long funding lease rules, a right of use asset under IFRS16 (or equivalent) is treated as a long funding finance lease where it meets the finance lease test in CAA 2001 s70N(1), or, in the case of lessees only, it meets either (i) the lease payments test (CAA 2001 s70O), or (ii) the useful economic life test (CAA 2001 s70P).
• The interest element on the right of use lease obligation becomes deductible, as do certain adjustments connected with remeasurements.

Corresponding changes are made in CTA 2010 and ITTOIA 2005.

Changes to the long funding lease rules (CAA 2001 part 6A)

The definition of a short lease is changed so that the term can be up to 7 years in length (instead of 5 years as currently) – CAA 2001 s70I.

Comment

Business should be considering the impact of these changes in preparation for the 1 January 2019 commencement date. For a further discussion of the changes please get in touch with the Mazars corporate tax team.