The Government is being urged to adopt a fairer, more transparent tax relief system to accommodate new lease accounting rules.

The changes, which take effect from January 1, 2019, will mean leased assets (including vehicles on operating leases) are brought on to companies’ balance sheets. They are being introduced by the International Accounting Standards Board (IASB) with the aim of giving a more complete picture of a company’s financial position.

However, HM Revenue & Customs (HMRC) says for lessees adopting the new standard, the link between accounting and tax treatment will be broken and changes will need to be made to the tax rules.

As a result, it proposed four options to change the tax treatment of the leasing of plant and machinery, including company vehicles, in a consultation which closed last month (October).

Option one involves minimal change to ensure that the current tax regime continues to function and deliver the same outcome for tax purposes.

Options two and three would involve a new tax regime based on the accounting entries, with option three providing an option to the lessee to claim enhanced or accelerated relief based on the value of the right to use the leased asset.

Finally, option four would see a new tax regime introduced based on the accounting entries, while also providing an option to the lessee to claim capital allowances based on the value of the right to use the leased asset.

HMRC has not signalled which option it prefers and says option one would change the total amount brought into charge to tax for a lessor or the amount of relief available to a lessee but options two, three and four could affect the timing of the charge and relief.

The British Vehicle Rental and Leasing Association (BVRLA) told Fleet News it supports option options two and three which would involve a move away from capital allowances to a system where tax relief for lessors is based on the real-world depreciation rates used in profit and loss statements rather than the rate usually applied through capital allowances.

Leasing customers would claim tax relief on rentals charged to their profit and loss statements. The BVRLA says that providing a leasing allowance would create an opportunity for lessees to receive extra tax relief by selecting ultra-low emission vehicles.

BVRLA chief executive, Gerry Keaney said: “HMRC’s review of the tax treatment of leases represents a real opportunity to introduce a simpler system that protects Government revenues while providing a fairer, more transparent tax relief structure for the vehicle leasing industry.

“Our members spend billions of pounds on new cars, vans and trucks each year and the right tax regime could really help drive the uptake of ultra-low emission vehicles.”

The BVRLA argues that under the current regime the timing of tax relief does not fairly reflect commercial realties and penalises lessors who are simply fulfilling an order placed by their customers.

In its response to the HMRC consultation, it said: “We would suggest it would be far simpler and effective from a behavioural perspective to follow the principle of the polluter, and only the polluter, pays.”

Vehicle depreciation is the single biggest cost to a vehicle lessor and the deferral of corporation tax relief through the application of capital allowances adversely affects cashflow and can distort pricing strategies as lessors of different sizes and tax circumstances seek to offset this situation, explained the BVRLA.

Some leasing companies report this can mean tax relief is being sought for vehicles for a period of 20 years or more, long after the vehicle has been sold. And, as the CO2 thresholds applied to the capital allowances regime reduce, this increasingly disadvantages lessors of passenger cars and this progression may not necessarily be offset by improvements in manufacturers’ technologies.

An HMRC spokesman told Fleet News: “We are currently considering submissions to the discussion document and will announce our next steps in due course.”

The Government’s preferred option is likely to be announced in next year’s Budget.