Budget 2017: Lease Taxation Post-Implementation of IFRS 16 Leases

Andre Anthony, Tax Associate, CMS

The Government announced yesterday that it will consult in summer 2017 on the legislative changes required following the implementation of the International Accounting Standards Board’s new leasing standard, IFRS 16 (Leases), which applies to periods of account beginning on or after 1 January 2019.

The tax treatment of a lease, in some important respects, is determined by its treatment in the accounts. Following the publication of HM Revenue & Customs’ discussion document “Lease Accounting Changes: Tax Response” on 9 August 2016 (the “Discussion Document”), the Government has now confirmed that it intends to maintain the current system of lease taxation “by making legislative changes which enable the rules to continue to work as intended”.

This effectively means that the Government will implement Option 1 of the Discussion Document. Option 1 envisages minimal changes to the current legislative framework governing the allocation of capital allowances in respect of leases, except in relation to the long funding lease regime.

Although Option 1 is intended not to add additional complexity to the current legislative framework, it remains to be seen how the revised lease taxation framework will interact with IFRS 16 (Leases), which heralds major changes in relation to the treatment of leases in lessees’ statutory accounts.

For all leases longer than 12 months, the dichotomy between finance leases and operating leases will be eliminated in lessees’ statutory accounts. IFRS 16 (Leases) thereby introduces a single accounting model that requires lessees to recognise assets and liabilities of all leases on balance sheet, unless the asset is of low value. This may mean that Option 1, by preserving the status quo, would require lessees to prepare a separate (non-IFRS 16) set of financial statements for capital allowances purposes, in respect of leases where a lessor is claiming capital allowances.

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