Clause 35 and schedule 13 amend various parts of tax legislation to ensure that, despite changes to the treatment of leases in accounting standards, the legislation continues to operate as intended and does not give rise to unfair outcomes.
The long funding lease regime, the corporate interest restriction rules, and certain other tax rules require taxpayers to distinguish between operating and finance leases in order to determine their tax treatment. The tax legislation has relied on accounting standards to make that distinction, but changes to the international accounting standards mean that from
That change will affect companies that prepare their accounts using international accounting standards and the UK accounting framework financial reporting standard 101, but not the alternative UK accounting framework FRS 102. It is therefore necessary for us to amend the tax legislation to ensure that it continues to operate as intended, and that companies do not face different tax outcomes depending on the accounting standards that they use.
The clause will mean that for tax purposes lessees will be required to continue to distinguish between operating and finance leases, even where that distinction is no longer required for accounting purposes. That will maintain the status quo and avoid unfair outcomes. Additionally, the changes to the treatment of leases in the accounting standards may lead to large tax adjustments on transition. To ensure that those adjustments do not lead to unfair outcomes or an excessive administrative burden, the adjustments will be spread over the weighted average length of all leases held by a company following the adoption of the new accounting standard.
The clause will ensure that, despite changes to the treatment of leases in some accounting standards, tax regimes that rely on those accounting standards continue to operate as intended. I therefore commend the clause and schedule 13 to the Committee.