indicated that lessors doing leases of standalone software assets
will be taxed on profit identified for accounting purposes.
Details of the corporation tax treatment for software leases
were revealed last month in a letter from HMRC to the Finance &
Leasing Association.
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The move by HMRC, which if resolved will clear up a long-running
debate over whether software leases should be taxed by capital
allowances or on profits based on the accounting model, brings
software leases into line with the treatment of unsecured loans, or
leases subject to long-funding lease (LFL) rules.
At one time, lessors would have preferred to claim capital
allowances (CAs) on the value of the software on lease. However,
with annual writing down allowances now down to a 20 percent rate
for virtually all IT assets, and few software leases running for
more than four years, accounting-based treatment will now be more
advantageous than claiming CAs for most of these deals.
Software which is an integral part of hardware assets in a lease
will not be affected by the latest announcement. Such leases will
continue to be treated like those of other plant and machinery,
with the CA position depending on whether or not the LFL rules are
applicable.
Invigors partner George Tonks said: “The new statement on
standalone software should remove the risk of lessors having to pay
tax on more then their true profit. Software financing deals are
often documented like leases, when in reality they are loans
because the finance company has not obtained legal title to the
software.
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By GlobalData“Tax-wise, the risk was that the whole rental stream would be
taxable, as for equipment leases outside the LFL regime, while CAs
could not be claimed because the financier does not own the
asset.”
Andy Thompson
