It says that for companies adopting the new standard or reporting under FRS 101, the link between the accounting and tax treatment under the long funded lease regime will be broken. So now there is an opportunity to review the current regime and decide whether to preserve the status quo or make more radical changes.
The consultation document, Lease Accounting Changes: Tax Response, suggests that a complete overhaul would make sense given that the leasing market has changed significantly since the financial crisis.
Before then, the banks dominated the market, particularly in big ticket leasing, largely because of the tax benefits to be derived from capital allowances.
But the lack of liquidity and tax capacity post 2008, the introduction of the long funding lease regime and the sale of lessor company provisions, and the fall in rates of capital allowances and tax, meant that most banks were no longer interested.
HMRC said: “Over the last few years many banks have largely withdrawn from leasing being replaced by different types of investors, for example investment funds seeking a steady stream of income. There is now a more specialised asset financing marketplace together with a move towards hire purchase.<?p>
“At the smaller end of the leasing market, the lessees could now be using the cash basis for tax purposes where capital allowances and the complexities of accounting are not relevant.
“Their presence has been replaced by different investors and a more specialised asset financing marketplace has developed in which hire purchase is playing a greater role.”
HMRC also points out that at the smaller end of the leasing market, lessees could be using the cash basis for accounting for tax purposes which means that capital allowances and “the complexities of accounting” are not relevant.
“These changes,” it said in a statement, “put different demands on the tax system which some may consider indicate a need for more extensive changes to the regime rather than simply preserving the status quo.”
Implementation of the standard will not affect businesses that use UK GAAP unless the Financial Reporting Council chooses to make changes to UK to bring it into line.
However, HMRC says that there is no indication so far that the UK standard-setter has made a decision to do so. In any case, nothing is likely to be done before 2022.
IFRS 16, meanwhile, will come into operation for accounting periods starting on or after 1 January 2019.
The department is seeking feedback from businesses, advisers and representative bodies. Comments should be sent to firstname.lastname@example.org by 30 October 2016.