ABSTRACT
This chapter discusses the UK treatment of finance leases and reviews relevant aspects of the literature concerning the valuation of debt interest tax shields in the context of the UK tax system. In order to take complex tax effects fully into account, lease evaluation should take place in the context of the firm as a whole rather than in isolation. The system of corporate taxation in the UK can create interdependencies between capital investment projects and the associated financing decision, and between ongoing and additional projects being considered; and the tax rules themselves interact, creating particularly complex situations where the firm has no taxable profits or where there is surplus ACT. Operational experience of the model reveals that its decisions may be significantly different from those indicated by conventional net present value analysis of individual projects.
