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FA 11: Adjustments for leases that become finance leases
or “Changes in tax reporting when a regular lease becomes a finance lease”
You could also call this:

“How to adjust taxes for certain long-term leases”

This section talks about what happens with certain types of leases. You need to pay attention if you have a lease that started between 20 May 1999 and 20 June 2007, and is still going after 20 June 2007.

If your lease meets some special conditions, you (as the person who owns the thing being leased) need to make some changes to your tax return. You’ll do this in the tax year after what’s called the “adjustment year”.

To work out how much to adjust, you’ll use a simple math formula. You’ll add up all the depreciation losses for the leased item from when the lease started until the end of the adjustment year, then divide that number by 6.

This adjustment amount becomes income for you in the year after the adjustment year. You’ll need to add this to the value of the leased item at the start of that year.

For any years after 20 June 2007 where this is still an operating lease, you can only claim five-sixths of the usual depreciation loss for the leased item.

Remember, these rules are quite specific, so if you’re not sure if they apply to you, it’s a good idea to ask for help.

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Next up: FA 12: Recharacterisation of amounts derived under hire purchase agreements

or “Tax rules for hire purchase sales treat them as loans with immediate property transfer”
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Part F Recharacterisation of certain transactions
Recharacterisation of certain commercial arrangements

FA 11BAdjustments for certain operating leases

  1. This section applies when a lease is an operating lease that—

  2. is entered into on or after 20 May 1999 and before 20 June 2007; and
    1. is an arrangement, or part of an arrangement that, on 20 June 2007, meets the requirements of paragraph (c)(i) to (iii) of the definition of finance lease; and
      1. has a term of the lease ending after the end of the income year in which 20 June 2007 falls (the adjustment year); and
        1. does not meet the requirements of section FA 11(1) before the end of the income year after the adjustment year.

          1. The lessor must adjust their income and expenditure calculated for the lease asset by including an adjustment in a return of income for the tax year corresponding to the income year after the adjustment year.

          2. The amount of the adjustment is calculated using the formula—

            total depreciation losses ÷ 6.

            Where:

            • In the formula, total depreciation losses is the total amount of depreciation loss for the lease asset for which the lessor is allowed a deduction in the period that begins with the start of the term of the lease and ends with the end of the adjustment year.

            • The amount of the adjustment is income of the lessor under the lease under section CH 6 (Adjustments for certain finance and operating leases) in the income year after the adjustment year.

            • The adjusted tax value of the lease asset at the beginning of the income year after the adjustment year is the total of the amount of the adjustment and the adjusted tax value that the lease asset would have in the absence of this section.

            • For an income year beginning after 20 June 2007 in which the lease is an operating lease, the amount of depreciation loss allowed for the lease asset other than under section EE 48 (Effect of disposal or event) is five-sixths of the amount of depreciation loss that would be allowed for the lease asset in the absence of this subsection.

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            Notes
            • Section FA 11B: inserted, on , by section 406 of the Taxation (Business Taxation and Remedial Matters) Act 2007 (2007 No 109).