The HMRC has presented seven possible taxation responses to changes in lease accounting. ‘IFRS16 Accounting for Leases’ will come into effect January 2019, along with the relevant changes in taxation.
This announcement comes not two months after a representative of HMRC announced the measures at the KPMG Leasing and Asset finance forum in London.
In the report ‘Lease Accounting Changes: Tax Response’, the government body presented four options for a new tax regime.
Under current lease accounting rules, a lease is defined as either a finance lease or operating lease, and both have different tax implications.
Finance leases are treated as the provision of finance, so a lessor must put the underlying fixed asset on its balance sheet and the lessee records this on its balance sheet along with the liability to make payments.
An operating lease is accounted for as the contract for the use of the asset over a fixed amount of time. In this instance, the lessor records the rents from the asset on the income statement. Lessees do not have to record anything related to the lease on the balance sheet.
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IFRS16 completely changes this system, removing the distinction between finance and operating leases. In light of this, HMRC proposed a raft of tax options.
The options were the status quo, an accounts-based regime, an accounts-based regime with leasing allowance, and an accounts-based regime with capital allowances.
HMRC stressed that IFRS16 would be revenue neutral in terms of tax. The report said: “None of these options would change the total amount brought into charge to tax for a lessor or the amount of relief available to a lessee but options 2, 3 and 4 could affect the timing of the charge and relief.”