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B3.340Y Long funding leases of plant and machinery—the general rules

The legislation providing for the tax treatment of 'long funding leases' of plant and machinery was introduced by FA 2006 with the intention of ensuring that lease finance and loan finance are taxed in much the same way. It is therefore restricted to leases which are essentially financing transactions, comprising mainly finance leases but also some operating leases.

The most significant feature of this regime is that, provided certain conditions are met, capital allowances will be available to the lessee rather than, as would be the case on ordinary principles, the lessor. As a consequence the lessee's allowable deductions in computing profits are restricted to exclude any expenditure to the extent that it qualifies for allowances.

Where a lessee applies FRS 102 (2024) as updated for the change in lease accounting for lessees or IFRS 16 in their financial statements, there is no distinction between a finance lease and an operating lease, a lessee recognises all leases on their balance sheet as right-of-use