BLM51040 - Right-of-use leases: right-of-use lessees: taxation of right-of-use lessees: long funding leases with variable rentals
A lease may have variable rentals.鈥� This could arise, for example, where there is a change in future lease payments resulting from a change in an index or rate used to determine听those payments.鈥� Such a change will require the听right-of-use听asset听lessee to remeasure their lease liability.听
厂别别鈥�BLM17035鈥痑苍诲鈥�BLM17040鈥� for more information on leases with variable rentals and when remeasurement is appropriate.鈥�听
When a听right-of-use听asset听lessee听has a long funding finance lease,听they are required to听take account of any remeasurement of the lease liability when calculating the amount that can be deducted after taking account of the restriction under either section 377 CTA 2010 or section 148G ITTOIA 2005.鈥�听
The legislation applies to a right-of-use听lessee where that lease is a long funding finance lease, and there is a change in the amounts payable under the lease which leads to a remeasurement of the lease liability, or the lessee accounts for a deduction in respect of the right-of-use听lease other than as an interest expense or an amount of depreciation, or an impairment in respect of the right听鈥�of听use asset.听
Where the legislation applies the deduction claimed by the lessee, after taking account of any limitation as a result of听either section 377 CTA 2010 or section 148G ITTOIA 2005, is increased or decreased to take account of the remeasurement or deduction.鈥�听
Example 1听
A company lessee has adopted IFRS 16 and has a long funding finance lease. At the end of year 5, the lease terms require the lessee to pay a one-off听rental based upon the number of widgets produced by the leased plant and machinery, giving rise to an additional听rental payment of 拢100,000. The lessee accounts for the payment as a debit in the profit and loss account, but not as an interest expense, in year 5.鈥� New section 377A CTA鈥�2010 provides that the deduction claimed by the lessee is whatever interest expense is recognised in respect of the lease liability, the limit of the deduction provided for by section 377, plus the 拢100,000.鈥�听
Example 2听
A lessee has adopted IFRS 16 and has a long funding finance lease. At the end of year 5, the lease terms require the rentals to be adjusted based upon the movement of an index. This results in the lease liability and right-of-use听asset being remeasured because the rental payments increase.鈥� The lease liability is increased by 拢100,000 and the right-of-use听asset is increased by 拢100,000.鈥� The lease runs for another five years听and the lessee depreciates the right-of-use听asset on a straight-line basis. Section 377A CTA 2010 provides that the deduction claimed by the lessee for each subsequent听period of account after year 5 is whatever interest expense is recognised in respect of the lease liability, the limit of the deduction provided for by section 377 of CTA 2010, plus the 拢20,000 depreciation charge which relates to the remeasurement.听