This consultation looks at the accountancy and tax interaction of leasing; in particular in relation to plant or machinery, but also in relation to the wider impact of the accounting change. IFRS 16 removes the classification of leases as either finance leases or operating leases for the lessee, treating all leases as on-balance sheet leases.

Any changes will affect those who lease plant or machinery for use in their business, lessors of plant or machinery, and companies who will account for other leases under the new accounting standard.

IFRS 16 is due to come into effect from accounting periods starting 1 January 2019.

Where a lease of plant or machinery is essentially a form of financing, the government’s intention is that, where possible, for leases over a certain duration, the tax treatment follows that applied to an acquisition of plant or machinery financed by way of loan.

Throughout the review, the government has stated that the changes will aim to maintain the status quo in terms of tax compliance issues.

This means that the existing tax rules will broadly apply as they do now in respect of the substance of the lease arrangements. In more detail:

for lessors using either IFRS 16 or FRS 102 and for lessees using FRS 102 (both of which groups will continue to distinguish between operating and finance leases) we will use the existing rules in determining the tax treatment for leases.

for lessees using IFRS 16, the long funding lease rules will apply in accordance with the substance of the lease arrangements, but using the reporting of the relevant assets, liabilities and costs that is available in the accounts as they are drawn up under the new standard.

where the long funding lease rules do not apply, the application of GAAP – whether IFRS 16 or FRS 102 – will, subject to existing exceptions, continue to give the quantum of the rental payments that are allowable deductions for tax purposes.

Changes to long funding lease rules will be required so that the legislation can continue to identify funding leases in the absence of the finance lease/operating lease distinction, and to allow the rules which currently apply in respect of long funding finance leases, to apply to all long funding leases accounted for by lessees using IFRS 16, in addition to finance leases of FRS 102 users.

Going forward the treatment of amounts of capital expenditure will change so a lessee adopting IFRS 16, who currently classifies their lease as an operating lease and determines the amount of capital expenditure under Capital Allowances Act 2001 (CAA 2001) section 70B as the market value of the plant or machinery, instead will have to use the rules of CAA 2001 section 70C and account for ‘commencement present value (at the start of the lease) of the minimum lease payments (PVMLP)’.

There are also a number of issues affecting additional expenditure which will see the rules diverge on the treatment under IFRS 16 and FRS 102, particularly as the latter will not be amended to reflect IFRS 16 in the immediate future, and certainly not before the IFRS standard is adopted.

The government plans to change the definition so that any lease that has a term of seven years or less is treated as a short-term lease.

There will be no changes to existing anti-avoidance rules on sale and finance leaseback, which are dealt with under Chapter 17 CAA 2001.

Equally the introduction of the short life lease of under 12 months and low value asset treatment for leases worth less than $5,000 (ca.£3,850) under IFRS 16 will not require any change to existing rules.

In response to this low value lease, the consultation states: ‘Where lessees are thereby not required to recognise assets and liabilities for leases, it is considered that no legislative change is needed to maintain the current tax treatment.’

Any changes to legislation will be included in Finance Bill 2018-19. The government first indicated that it would have to change existing rules in August 2016, when a preliminary discussion document was released.

It is worth noting that s53 of Finance Act 2011 (FA 2011) will be repealed when the new rules come into force as this was only a temporary measure introduced to offset any potential negative impact if IFRS 16 had been introduced early.

For businesses with operating leases choosing to early-adopt IFRS 16, prior to the legislative changes proposed in this consultation take effect, the tax treatment of the leases will continue to be subject to the existing requirements of s53 FA 2011.

The closing date for comment is 28 February 2018.

HMRC consultation, Plant and machinery lease accounting changes, issued 1 December 2017.

Report by Sara White