Budget 2026 – revised tax treatment of leases

Budget 2026 – revised tax treatment of leases

Revised lease accounting rules means immediate change to tax treatment for businesses using lease and leaseback arrangements for plant and machinery, as part of the 2026 budget, where HMRC confirmed immediate changes to the tax treatment of certain lease and leaseback arrangements.

This means a right-of-use leaseback will be treated as a finance leaseback for tax purposes. The tax changes come into effect immediately although companies do not have to report under the new standards yet as they only commence for accounting periods from 1 January 2026. Early adopters will benefit from clarity.

The measure will affect for qualifying expenditure incurred from 28 October 2026 for both corporation tax and income tax purposes. Where a chargeable period straddles that date, the relevant amounts will be apportioned between the periods before and the periods on or after 28 October 2026. 

‘The amendment will make sure that arrangements which would previously have been treated as finance leasebacks continue to be treated in that way following changes to accounting standards,’ HMRC said.

‘Deductions for rental payments will generally be limited to the finance charge over the life of the leaseback,’ HMRC added. ‘Other lease and leaseback arrangements will continue to be subject to an upfront tax charge, with deductions available for rental payments.’ 

The reason for the change is that leases are going on to the balance sheet under the new rules set to take effect shortly. The new accounting approach ‘messes’ with the current tax treatment of leases, although balance sheet leases have been standard for some companies for seven years since 2019, and the rules are effectively a reflection of the international accounting standard.

HMRC warned the revised lease accounting rules ‘no longer differentiate between finance and non-finance leases, leaving some lessees subject to unintended tax treatment. This amendment restores the intended differentiation and thus the previous treatment.’

In a written clarification, HMRC added: ‘The tax treatment for a finance leaseback generally limits deductions for rental payments to ensure that relief is only available for the finance charge over the life of the leaseback.‘

‘Changes to accounting standards in 2019 and 2026 required affected lessees to account for right-of-use assets instead of finance or operating leases. In line with updates to other tax legislation reflecting those changes, the Budget measure extends the tax treatment to apply to a right-of-use lease which would, under previous standards, have been categorised as a finance lease. This ensures that the legislation continues to work as originally intended.’