Sale and leaseback (S&LB) of assets is a
useful technique for improving working capital and is increasing in
popularity again, even though many of the historical tax benefits
are greatly reduced.
In the following brief article I highlight the
key accounting and tax points that need to be considered before
implementing these transactions. S&LB on property and related
assets are extremely complex and could not be covered within this
UK GAAP, SSAP 21 & FRS 5 provide guidance.
The risk and rewards of ownership of the asset need to be
considered to determine whether the asset has been sold or just
pledged as security for a loan. This will determine if the
transaction is accounted as a finance lease or as a genuine sale,
thereby determining the need to recognise the profit or loss on
If a finance lease, any apparent profit or
loss should amortised over the shorter of the lease term and the
useful life of the asset. If the leaseback is an operating lease,
any profit and loss:
• Should be recognised immediately if at fair
• Should be recognised immediately if the sale
price is below fair value, except if the apparent loss is
compensated by future rentals at below market price it should be
amortised over the remainder of the lease term
Over fair value should be amortised over the
shorter of the remainder of the lease term and the period to the
next rent review Treatment under IAS 17 of the IFRSs is very
similar to UK GAAP, although leases are more likely to be finance
in nature given the prescriptive tests and there is no 90 percent
minimum lease payment rule.
HMRC has been tightening the tax regime for
S&LB transactions over a number of years. The latest set of
changes were introduced in the Finance Act 2008.
The FA 2008 now treats the vast majority of
S&LB transactions as a sale and “long funding” lease back for
tax purposes. This means capital allowances are generally retained
by the lessee and the lessor is taxed on its accounting profit.
There is one helpful dispensation, often
called the “four month rule”. This dispensation allows the parties
to elect out of the long funding rules on the S&LB of new or
nearly new plant assets within the first four months. This means
right to capital allowances can still be transferred to the
From a VAT perspective, S&LB transactions
have been used by partially exempt organisations to spread the VAT
cost over the life of the lease. These have often involved in-house
HMRC has introduced anti-avoidance legislation
which requires disclosure of arrangements to be made if the parties
involved in the transaction are connected. Failure to adhere to
these rules could lead to significant penalties. Although these
changes do not ordinarily impact on commercial arms length
arrangements, they can impact on arrangements between unconnected
parties in cases where the lessee directly or indirectly funds the
purchase of the leased goods.
In conclusion S&LB is and will continue to
be an important funding method, although the accounting and tax
aspects need careful consideration to avoid costly pitfalls.
The author is the head of Leasing
& Asset Finance at Grant Thornton