Finance Act 2009

2009 CHAPTER 10

Introduction

Section 64 Schedule 32: Leases of Plant Or Machinery

Summary

1.Section 64 and Schedule 32 introduce legislation to counter avoidance involving the leasing of plant or machinery.

Details of the Schedule

Disposal values: commencement of long funding finance leases

2.Paragraph 1 amends the disposal value to be brought into account on granting a long funding lease.

3.Sub-paragraph (2) replaces item 5A in the Table at section 61(2) of the Capital Allowances Act 2001 (CAA) with revised text. The description of the disposal event is unchanged but the disposal value is now found by taking the greater of the market value of the plant or machinery and the qualifying lease payments.

4.Sub-paragraph (3) inserts a new subsection (5A) into section 61 of CAA; this defines the “qualifying lease payments” for the purposes of item 5A. These are the minimum payments under the lease excluding the gross return on investment, i.e. the ‘interest’ element in the lease rental payments, and so much of any payment included in the lease rental in respect of charges for services or payments to cover qualifying tax to be paid by the lessor. Any initial payment made by the lessee is included in the calculation of the qualifying lease payments and thus will not be taxed on the lessor under section 785B of the Income and Corporation Taxes Act 1988 (ICTA) or section 809ZB of the Income Taxes Act 2007 (ITA).

5.Sub-paragraph (4) repeals subsections (6) to (9) of section 61 of CAA. These subsections relate to the meaning of the expression “net investment in the lease” and are no longer relevant as the revised disposal value does not use this concept.

6.Paragraph 2 repeals paragraph 4 of Schedule 20 to Finance Act (FA) 2008 which introduced subsections (6) to (9) of section 61 of CAA.

7.Paragraph 3 amends section 25A of the Taxation of Chargeable Gains Act 1992 (TCGA) so that it is consistent with the changes made to section 61 of CAA by paragraph 1.

8.Sub-paragraph (3) substitutes for subsections (4) to (4D) a definition of “relevant disposal value”. For long funding finance leases this is the value at item 5A of the Table in section 61(2) of CAA and for long funding operating leases it is the value at item 5B of that Table.

9.Paragraph 5 contains commencement provisions.

Disposal values: termination etc of long funding leases

10.Paragraph 6 amends section 66 of CAA by inserting a reference to section 70E of CAA. This puts beyond doubt that the definition of disposal receipt at section 60 of CAA includes a disposal under section 70E.

11.Paragraph 7 amends the definition at section 70E of CAA of the disposal value when a long funding lease comes to an end. It also provides that a disposal value is brought into account when the leased asset ceases to be used wholly for a qualifying activity.

12.Sub-paragraph (2) replaces the phrase “the lease terminates” at section 70E(1)(c) with the phrase “a relevant event occurs”.

13.Sub-paragraph (3) inserts new subsection (1A) into section 70E of CAA which defines a relevant event. A relevant event occurs where the lease terminates or the plant or machinery begins to be used wholly or partly for purposes other than that of the qualifying activity or the lessee’s qualifying activity permanently ceases.

14.Sub-paragraph (4) substitutes the phrase “relevant event” for the phrase “termination of the lease” at section 70E(2)(a). This means that a relevant event is a disposal event, with the effect that the disposal value to be brought in by a lessee under a long funding lease is given by section 70E rather than by the general rules at section 61 of CAA.

15.Sub-paragraph (5) replaces subsections (3) to (8) of section 70E of CAA with new subsections (2A) to (2H).

New subsection (2A) provides a formula for calculating the disposal value to be brought into the capital allowances computations of a lessee when the lessee’s deemed ownership of the leased asset ends, either because the lease terminates or because the plant or machinery ceases to be used wholly for the purpose of a qualifying activity. The formula deducts from the lessee’s qualifying expenditure on the plant or machinery at the commencement of the lease an amount referred to as “the qualifying amount” and adds any relevant rebate received.

New subsection (2B) provides the definition of “the qualifying amount” for the lessee under a long funding operating lease. “The qualifying amount” is the aggregate amount of the reductions made under section 502K of ICTA or section 148I of the Income Tax (Trading and Other Income) Act 2005 (ITTOIA).

New subsection (2C) provides the definition of “the qualifying amount” for the lessee under a long funding finance lease. “The qualifying amount” is the aggregate of the amounts paid to the lessor by the lessee. This amount includes any initial payment and also includes any payment made under a guarantee. It excludes the amounts mentioned in new subsection (2D).

New subsection (2D) provides that the amounts to be excluded from the “qualifying amount” in subsection (2C) are so much of any payments under the leases as represent finance charges, any service charges and qualifying UK or foreign tax to be paid by the lessor. The meaning of “qualifying UK or foreign tax” is given in section 70YE of CAA.

New subsection (2E) provides for an adjustment to the qualifying amount where the lease rentals exceed an arm’s length amount. This will ensure that the disposal value brought in results in the lessee obtaining capital allowances for the arm’s length cost of the asset.

New subsection (2F) provides the definition of the relevant rebate.

Paragraph (a) defines relevant rebate as any amount that is calculated by reference to the termination value of the plant or machinery and which is payable either directly or indirectly for the benefit of the lessee or to any person connected to the lessee. It is the amount generally referred to as a lease rental rebate.

Paragraph (b) defines relevant rebate where the disposal value occurs as a result of a change in the use of the plant or machinery or the cessation of the qualifying activity. In those circumstances it is the amount that would have been payable had the lease terminated at that date and the plant or machinery been sold for its market value.

New subsection (2G) makes it clear that relevant rebate, as defined at subsection (2F), is an amount that would reasonably be expected to have been paid if the lease transaction had been between parties acting at arm’s length in cases where either a low or no rental rebate is paid because the transaction is not at arm’s length.

New subsection (2H) provides that the disposal value given by the formula in new subsection (2A) cannot be less than nil.

16.Paragraph 8 provides the commencement rule for relevant events within the meaning of section 70E(1A) of CAA.

Capital receipts treated as income

17.Paragraph 9 makes amendments to section 785C of ICTA which ensure that where an initial payment is brought in as a disposal value it is not also taxed as income under section 785B of ICTA.

18.Sub-paragraph (4) inserts new subsections (9A) and (9B) into section 785C of ICTA. New subsection (9A) says that a capital payment is not relevant to the extent that it is an initial payment under a long funding lease and a disposal receipt under section 61 of CAA falls to be brought into account by the lessor on the granting of the lease.

19.Paragraph 10 makes amendments to section 809ZB of ITA that, for income tax, mirror those made by paragraph 9 for corporation tax.

20.Sub-paragraph (2) provides that in relation to payments made under leases whose inception is before 22 April 2009 and for which a disposal receipt under section 61 of CAA falls to be brought into account no relevant payment arises under section 785C(9A) of ICTA and section 809ZB(9A) of ITA.

Transfer and long funding leaseback: restrictions on lessee’s allowances

21.Paragraph 12 amends subsection 51A(10) of CAA by inserting a reference to new section 70DA(2). This makes it clear that no annual investment allowance is available to the lessee under a transfer and long funding leaseback arrangement.

22.Paragraph 13 amends subsection 52(5) of CAA by inserting a reference to new section 70DA. This makes it clear that no first year allowance is available to the lessee under a transfer and long funding leaseback arrangement.

23.Paragraph 14 amends subsection 57(3) of CAA to ensure that a person’s available qualifying expenditure does not include an amount excluded by new section 70DA.

24.Paragraph 15 inserts new section 70DA after section 70D of CAA. This section has a similar effect to sections 217 and 218 of CAA which deny first year allowances and limit the qualifying expenditure in an arrangement where an existing business asset is sold and leased back to the same person or someone connected to them. That legislation only applies to a claim by new owners of the plant or machinery who leases it back to the original seller or someone connected to them. Because the lessee under a long funding lease is deemed to own the leased asset it is the lessee in a transfer and long funding leaseback arrangement who has the qualifying expenditure and so is the person to whom new section 70DA applies.

25.Subsection (1) sets out the circumstances where new section 70DA applies. These are where a person (S) transfers (see subsection (7)) plant or machinery to another person (B) and after the transfer the plant or machinery is used by S or a person connected to S (CS) and is available to be so used because it has been leased under a long funding lease.

26.Paragraph 16 inserts new subsection (1C) into section 70H of CAA. This ensures that where the arrangements involve a transfer and long funding leaseback as defined in new section 70DA(1) the lessee is not entitled to treat the lease as a non-long funding lease. This makes it clear, in case of any doubt, that the lessee cannot claim a deduction for the capital element of their lease rental payments.

27.Paragraph 17 provides that the amendments made by paragraphs 12 to 16 apply to leasebacks where the term of the lease commenced on or after 13 November 2008. The definition of commencement is in paragraph 27.

Transfer followed by hire purchase etc: restrictions on hirer’s allowances

28.Paragraph 18 amends subsection 51A(10) of CAA by inserting a reference to new section 229A(2). This makes it clear that no annual investment allowance is available to the lessee under a hire purchase etc and long funding leaseback arrangement.

29.Paragraph 19 amends subsection 52(5) of CAA by inserting a reference to new section 229A. This makes it clear that no first year allowance is available to the lessee under a hire purchase etc and long funding leaseback arrangement.

30.Paragraph 20 amends subsection 57(3) of CAA to ensure that a person’s available qualifying expenditure does not include an amount excluded by new section 229A.

31.Paragraph 21 inserts new section 229A after section 229. This section has the same effect as sections 217 and 218 of CAA which deny first year allowances and limit the qualifying expenditure in an arrangement where an existing business asset is sold and leased back to the same person or someone connected to them. That legislation only dealt with a claim by new owners of the plant or machinery who leased it back to the original seller or someone connected to them. New section 229A covers cases where capital allowance entitlement arises to a person under a contract that means that they shall or may become the owner of the plant or machinery where this contract follows a transfer by the person of the same plant or machinery.

32.Paragraph 22 provides that the amendments made by paragraphs 18 to 21 apply to leasebacks where the lease commenced on or after 13 November 2008.

Finance leaseback

33.Paragraph 23 amends section 216(1)(b)(i) of CAA. It inserts after “S” the phrase “or by a person (other than B) who is connected with S”.

34.Paragraph 24 amends section 221(1)(b)(i) of CAA. It replaces the phrase “qualifying activity carried on by S” with “an activity carried on by S or by a person (other than B) who is connected with S”.

35.Paragraph 25 provides that the amendment made by paragraph 23 has effect where the date of the relevant transaction is on or after 22 April 2009. Where section 216(1)(b) of CAA is relevant for the purposes of an election under section 227 of CAA, the amendment made by paragraph 24 applies where the date of the transaction referred to at section 227(1)(a) of CAA is on or after 22 April 2009.

36.Paragraph 26 provides that the amendment made by paragraph 24 has effect where the date of the relevant transaction is on or after 22 April 2009. Where section 221(1)(b) of CAA is relevant for the purposes of section 228A of CAA the amendment made by paragraph 24 applies where the date of the transaction referred to at section 228A(2)(a) of CAA is on or after 22 April 2009.

Interpretation

37.Paragraph 27 says that the words “commencement” and “inception” in this Schedule have the meanings given in section 70YI of CAA and so are in line with the long funding lease rules generally.

Background Note

38.Schedule 32 counters disclosed avoidance schemes involving the leasing of plant or machinery. HMRC does not accept that these schemes achieve their aim. In addition it amends legislation covering the tax position of a lessee at the end of a long funding lease and makes small changes to the definitions of “sale and leaseback” and “sale and finance leaseback”.

The lease and long funding leaseback schemes

39.The lease and leaseback avoidance involves an asset owner who has claimed capital allowances on that asset granting a long funding finance lease of the asset to another person who leases the asset back to them under a long funding operating lease. The intention is that the lessor receives a lump sum that is commercially equivalent to a loan which is neither taxed as income nor brought into their capital allowances computation, leaving the lessor with a continuing entitlement to capital allowances over and above the net cost of the asset to them. The timing of the benefit can be enhanced if the lessee under the leaseback can claim a first year allowance.

40.This measure will ensure that the person granting the long funding lease is taxed on the lump sum received and that on reacquisition there is capital allowance symmetry. It also removes the lessee’s entitlement to first year or annual investment allowances.

The sale and long funding leaseback scheme

41.The sale and leaseback avoidance scheme is also based on arrangements that are commercially equivalent to a secured loan. An owner sells plant or machinery used in their business to a finance provider and leases it back when it is worth more than its original cost to the owner. The aim is that the seller will obtain increased capital allowances entitlement where in substance they have received a loan and there has been no change in the use of the asset.

42.This measure provides a rule that limits the qualifying expenditure that can be claimed by the lessee under the long funding leaseback to the amount that has been brought in as disposal proceeds by the seller (or head lessor). Where the seller or head lessor has not claimed capital allowances the qualifying expenditure will be limited to the lower of market value or the cost, to the seller, of the plant or machinery.

Lessees under long funding leases

43.Lessees under a long funding lease are entitled to claim capital allowances and when the lease ends a disposal value must be brought into account. The disposal rules (in section 70E of CAA) do not work as intended and give an unintended tax benefit in certain circumstances.

44.This measure provides a revised formula for calculating the disposal proceeds to be brought into account by the lessee under a long funding finance lease. In addition the disposal rules at section 70E of CAA now ensure that a lessee who emigrates during the period of the long funding lease brings into account an appropriate disposal value.

The “sale and leaseback” and “sale and finance leaseback” definitions

45.The definitions of “sale and leaseback” and “sale and finance leaseback” at sections 216 and 221 of CAA are aimed at avoidance involving connected party leasing arrangements that:

seek tax relief in excess of the cost to the seller’s group, or
effectively sell capital allowance entitlement to third parties.

The existing definitions do not cover arrangements involving the leaseback to a person connected to the seller who is already leasing the asset and continues to do so.

46.This measure amends the definitions to ensure that they include arrangements involving a leaseback to a continuing user of the asset.

Finance Act 2009 Explanatory Notes