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Consultations on lease accounting changes

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Following consultation between August and October 2016 on options for changing the tax rules on plant and machinery leasing in response to the new lease accounting standard IFRS 16, the government has decided to maintain the current system of lease taxation by making legislative changes necessary to preserve the current tax treatment overall. HMRC is now consulting until 28 February 2018 on those changes, and on the wider tax impact of IFRS 16, which has a mandatory implementation date of 1 January 2019.

IFRS 16 removes the classification of leases as either finance leases or operating leases for the lessee and the consultation proposes a number of detailed changes to the long-funding lease rules.

The government expects to repeal Finance Act 2011, s53, which currently applies as a temporary measure to negate any change in a leasing accounting standard for tax purposes, in a future Finance Bill with effect from 1 January 2019.


HMRC is consulting separately until 28 February 2018 on three options for amending the corporate interest restriction (CIR) rules to accommodate IFRS 16. The CIR rules require identification of the finance element for payments to be recognised as ‘tax-interest expense’.

The three options proposed are:

  • Option 1: follow the accounting (resulting in a different treatment for lessees depending on whether IFRS 16 or FRS 102 adopted);
  • Option 2: keep a distinction between operating leases and finance leases for CIR purposes; or
  • Option 3: introduce a distinction between ‘funding leases’ and ‘non-funding leases’, to be defined in tax legislation for CIR purposes (accounting classification of a lease would be ignored and a company would apply tax rules in order to classify a lease).

Option 3 (‘funding lease’ definition) would contain three tests to be applied to all leases, only one of which needs to be met:

  •  finance lease test;
  • lease payment test; and
  • useful economic life test.

Legislation is expected to be included in a Finance Bill to be published in 2018, to take effect from 1 January 2019. See

Issue: 1380
Categories: News