On 1 December 2017, HMRC published a summary of the responses to its discussion document “Lease Accounting Changes: Tax Response", combined with a new consultation “Leasing: Tax response to accounting changes”, on proposed new rules to take effect from 1 January 2019.
From 1 January 2019, or earlier if desired, businesses preparing their accounts in accordance with IFRS will be obliged to operate IFRS16 Leases, replacing IAS17 Leases. This departs from the familiar concepts of Finance Leases and Operating Leases (replacing them with a “Right of Use” asset and lease liability), on which UK tax law is based. For the avoidance of doubt, FRS102 retains the distinction between operating and finance leases.
Initial Consultation:
The initial consultation was on whether legislation should be brought in to maintain the status quo or more radical reform of the tax rules for leases was required, with four options being presented:
- Status quo: minimal changes to ensure that the current tax regime continues to function.
- Accounts based regime: a new tax regime based on accounting entries.
- Accounts based with leasing allowance: as per (2) but providing an option for the lessee to claim enhanced or accelerated relief.
- Accounts based with capital allowances: as per (2) but providing an option for the lessee to claim capital allowances.
Replies:
There were 26 written replies and 51 given in face to face meetings.
The majority of respondents favoured maintaining the status quo; this was principally due to the relative stability and certainty of the regime. The availability of capital allowances for lessors was also viewed as a significant benefit, as well as the government’s ability to incentivise and promote business growth.
None of the respondents favoured option 3, as it was excessively complex and easy to arbitrage. Lessees would also often not have access to the information needed.
The government has decided to make legislative changes so the rules continue to work as they do currently.
New Consultation:
The broad intention of the proposed rules, intended to take effect from 1 January 2019, is that the treatment of
- Long funding leases follows that of an acquisition, with only the finance charges being treated as revenue items (for both lessor and lessee).
- Other leases would be treated as revenue items (for both lessor and lessee)
Changes are noted as being necessary so as to identify funding leases in the absence of the distinction between finance and operating leases.
In general, no changes should be necessary for lessees operating FRS102 or lessors. Lessees operating IFRS16 would need to apply s70C CAA2001 to determine the capital expenditure.
It is also suggested that the “short lease” rules can be simplified to cover any lease of seven years or less following the reduction of the rate of capital allowances to 18% (cf. 25% when they were written).
The consultation closes on 28 February 2018 and responses should be sent to
Specific Queries:
- Are there any arrangements that could be disadvantaged by this approach, compared to the current treatment?
- Would the change to the short lease rules be a useful simplification? Would it provide a distorting tax timing advantage of one method of asset finance over others?
- Would the replacement of the current finance lease test at section 70N CAA 2001 by a new test, based on the question of the transfer of the risks and rewards of ownership, be a practicable change for lessees using IFRS 16? Is there a better way for those businesses to identify funding leases?
- Are any problems envisaged from the application of section 70YA to operating lessees adopting IFRS 16? In particular, might this distort commercial decisions to change from one accounting standard to another?
- What issues are likely to arise from the application of the rules of sections 377 and 378 CTA 2010 for new and particularly existing leases that would previously have been long funding operating leases but which are now accounted for by lessees under IFRS 16?
- Are any issues likely to arise with this approach to the North Sea Oil ring fence rules? Is another approach preferable?
- Are there other issues expected to arise from the repeal of section 53 FA 2011? What is your preferred option to mitigate Exchequer exposure upon transition? Do you expect the transitional impact on reserves of moving to IFRS 16 to be significant for many businesses or for individual business sectors? If so, please provide information or evidence to support that view. Are there other, more favourable options that would reduce legislative complexity or administrative burdens for businesses?
Links:
HMRC: Leasing: Tax response to accounting changes
Lease Accounting Changes: Tax Response
Corporate Interest Restriction: Tax response to accounting changes for leasing
