Initial period lease/licence fees
For many schemes, the level of the initial lease/licence fee is the same as later years, even though it is for the lease or licence of land for a substantially shorter period of time - that is, the period to which the payment relates may be one month or less. In such cases, the amount of the initial lease fee may not be fully deductible by participants. In these cases, a portion of the fee will be treated as a premium which is capital in nature, or the prepayment provisions will apply to the expenditure, depending on the facts of the case.
In cases where the initial lease fee has been inflated to reduce the level of lease fees in subsequent years, the prepayment provisions will apply to apportion the initial lease fee over the term of the scheme or 10 years, whichever is the less.
Part of the initial lease fee will be considered to be a premium, and hence capital in nature, where there is evidence that the subsequent year lease fees are commercially realistic and have not been reduced as a result of the higher initial lease fee. In such cases, participants will only be entitled to claim, as a deduction, that part of the fee which is not capital in nature.
These principles apply equally to other rights under contract (for example, licences) which provide participants with an interest in a scheme.