Theory and Practice
Lease payments often include indirect taxes such as sales tax, VAT, or GST. The lease accounting treatment of these taxes is driven by two questions:
1. recoverability (full, partial, or none) and
2. legal incidence (which party is legally required to remit the tax).
In practice, these taxes are usually treated as amounts collected on behalf of a government authority rather than consideration paid to the lessor for the right to use an asset (IFRS Interpretations Committee, 2021b). Four rules can be applied:
Global decision rules (applies across jurisdictions)
Rule A — Fully recoverable taxes (VAT/GST creditable)
If the lessee can fully recover the tax through an input tax credit/refund mechanism, the tax is treated as a tax receivable, excluded from lease measurement, and does not affect profit or loss (CRA, 2023; HMRC, 2025).
Rule B — Partially recoverable taxes
If only part of the tax is recoverable (common for partially exempt entities), the recoverable portion is recorded as a receivable; the non‑recoverable portion is treated as a cost and is accounted for separately from the lease liability (IFRS Interpretations Committee, 2021b; HMRC, 2025).
Rule C — Non‑recoverable taxes
Where the tax is not recoverable, the dominant IFRS view is that non‑refundable VAT on lease payments is a government levy rather than a lease payment to the lessor, and therefore is excluded from lease payments used to measure the lease liability (IFRS Interpretations Committee, 2021b).
Rule D — US GAAP “bundling” nuance
Under US GAAP, some pass‑through amounts can be included in lease measurement when a lessee elects the practical expedient to combine lease and non‑lease components, but this is a policy election/presentation effect rather than a change in underlying tax economics (PwC, 2023; AICPA & CIMA, 2022).
Lease accounting systems like Sage Intacct’s, are commonly configured to support these determinations by allowing taxes to be flagged for recoverability and inclusion/exclusion logic, which is particularly important for cross‑province Canadian portfolios and for ASC 842 component elections (CRA, 2023; PwC, 2023).