U.K. Lease-Tax Change Unlikely to Affect Financial Reporting

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By David R. Jones

Aug. 12 — Any changes to U.K. tax policy for the leasing of plant or machinery probably won't affect reporting requirements under international financial reporting standards, the U.K. Financial Reporting Council (FRC) told Bloomberg BNA.

FRC—which sets accounting, auditing and actuarial standards for the U.K. and Ireland—said in an Aug. 12 e-mail response to questions on proposed changes to U.K. tax law that “it seems unlikely that changes in taxation of leases and plant or machinery will have an impact on the requirements” in U.K. Financial Reporting Standard 101.

The council issued limited amendments to FRS 101 last month that focused primarily on providing exemptions from many of the disclosure requirements of IFRS 15: Revenue from Contracts with Customers.

Voluntary Disclosures Permitted

Publicly listed companies are the main users of the recognition and measurement requirements in IFRS that are included in FRS 101.

In addition, entities within groups have the option to prepare financial statements in accordance with IFRS under FRS 101, but with reduced disclosure requirements.

“It should be noted that companies can include voluntary disclosures that are not required by FRS 101, and that changes to the taxation regime may result in companies making different voluntary disclosures,” the e-mail said.

Responding to Leases Standard

FRC's response to questions follows the Aug. 9 release of a discussion document by the government's tax department, HM Revenue & Customs (HMRC), outlining options for tax responses to the International Accounting Standards Board's far-reaching leasing accounting standard, IFRS 16.

The standard, published in January, requires that all major leases be reported on a lessee's balance sheet as assets and liabilities by Jan. 1, 2019 and eliminates the distinction between finance leases and operating leases (12 APPR 01, 1/15/16).

Changes Required

The U.K. government's 2016 budget, issued March 16, contained a provision for issuing a discussion document on options for changing the tax treatment of leases of plant and machinery under IFRS 16.

“For lessees adopting the new standard, the link between the accounting and tax treatment will be broken and changes will need to be made to the tax legislation,” the discussion document said.

Impact on U.K. GAAP

Companies that use U.K. Generally Accepted Accounting Principles other than FRS 101, however, won't be subject to IFRS 16 unless FRC changes U.K. GAAP to align it with the international leases standard, HMRC said.

FRC expects to develop proposals to amend FRS 102, which encompasses U.K. GAAP, this year that will be subject to a formal consultation by the council in 2017.

“At this stage it is impossible to determine whether or not IFRS 16 will be incorporated into UK GAAP,” FRC said in its e-mail.

Options for Tax Changes

HMRC's discussion document proposes four options for tax changes:

  •  maintaining the status quo with minimal revisions;
  •  establishing an accounts-based system that would identify leasing transactions based on their accounting treatment;
  •  setting up an accounts-based regime with a leasing allowance; and
  •  creating an accounts-based framework with capital allowances.

Keeping the status quo with few changes would continue to make capital allowances available to lessors except under long-term funding leases, the discussion document said.

Assessing the Impacts

HMRC is looking to explore the comparative impacts that each option might have on such business decisions as investment in plant and machinery and the choice of asset finance.

“These options are not exhaustive,” the discussion document said, and HMRC indicated it would “consider other possible approaches to the taxation of leasing that are suggested.”

Changes to Leasing Market

The proposed revisions to taxation of plant and machinery in the U.K. come amid a broader transformation of the leasing market in recent years, which until recently was dominated by banks seeking tax benefits that could be gained from capital allowances, HMRC said.

The leasing market has changed, though, following the 2008 financial crisis that produced a dearth of liquidity and shrinking tax capacity.

New Demands on Tax System

“Over the last few years many banks have largely withdrawn from leasing being replaced by different types of investors, for example investment funds seeking a steady stream of income,” the discussion document said.

These changes to the leasing market have placed different demands on the U.K.’s tax system, HMRC said, which could require more extensive revisions to the tax regime than simply continuing with business as usual.

Formal Consultation Coming

In soliciting the views of stakeholders, HMRC said it is particularly interested in feedback from lessees, lessors, professional agents and organizations representing professionals.

“After considering responses from the discussion period the government will then formally consult on their preferred option,” HMRC said.

Comments on the discussion document must be received by Oct. 30, 2016.

To contact the reporter on this story: David R. Jones in London at correspondents@bna.com

To contact the editor responsible for this story: Ali Sartipzadeh at asartipzadeh@bna.com

Copyright © 2016 Tax Management Inc. All Rights Reserved.

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