Part 19: Sale and lease-back etc
Overview
2457.This Part rewrites sections 779 to 785 of ICTA (sales and lease-backs) for the purposes of corporation tax.
2458.Sections 779 and 781 to 785 of ICTA first appeared as sections 17 to 19 of, and Schedule 7 to, FA 1964. Section 780 of ICTA first appeared as section 80 of FA 1972. There have been numerous changes to the taxation of leasing since 1972, but sections 779 to 785 of ICTA are still capable of applying.
2459.The four main operative sections of the source legislation – sections 779, 780, 781 and 782 of ICTA – have been rewritten in separate Chapters. Within each Chapter, the detailed provisions have been laid out in sections arranged in a rational order. The legislation is also being split between the corporation tax and income tax codes.
2460.This Part has the following structure.
Chapter 1 (payments connected with transferred land) is based on section 779 of ICTA.
Chapter 2 (new lease of land after assignment or surrender) is based on section 780 of ICTA.
Chapter 3 (leased trading assets) is based on sections 782 and 785 of ICTA.
Chapter 4 (leased assets: capital sums) is based on sections 781, 782(1) and 783 to 785 of ICTA.
2461.Chapters 1 and 2 apply to certain transactions in land. Chapters 3 and 4 apply to certain transactions in assets other than land.
2462.If Chapter 1 or Chapter 3 applies, tax relief for lease rental (or similar) expenditure is deferred (and may in certain circumstances be denied).
2463.If Chapter 2 or Chapter 4 applies, a capital sum is taxed as income.
Chapter 1: Payments connected with transferred land
Overview
2464.This Chapter is based on section 779 of ICTA. It counters certain avoidance devices based on arrangements for the sale and lease-back of land or on analogous arrangements, such as arrangements for sale of land with reservation of a rentcharge. It restricts tax relief for lease rental expenditure.
2465.The Chapter has the following structure.
Section 834 summarises the Chapter.
Sections 835 to 837 say when the Chapter applies and define “relevant corporation tax relief”.
Section 838 restricts relevant corporation tax relief and carries forward relief which has been denied.
Sections 839 to 842 restrict corporation tax relief for certain insurance company expenses and carry forward relief which has been denied.
Sections 843 to 848 are interpretative.
Section 834: Overview
2466.This section summarises this Chapter. It is new.
Section 835: Transferor or associate becomes liable for payment of rent
2467.This section sets out the conditions for section 838 or, as the case may be, section 839 to apply in a case involving the payment of rent. It is based on section 779(1), (3), (13) and (14) of ICTA.
2468.Subsection (1) lists the conditions which must be met if section 838 (relevant corporation tax relief: deduction not to exceed commercial rent) is to apply.
2469.The words “rent” and “lease” appear for the first time in this Chapter in subsection (1)(b). They are defined in section 846.
2470.Subsection (2) lists the conditions which must be met if section 839 (deduction under section 76 of ICTA not to exceed commercial rent) is to apply.
2471.Subsection (3) explains what is meant in subsections (1)(a) and (2)(a) by “transferring” an estate or interest in land.
2472.Subsection (4) explains what is meant in this Chapter by the “transferor”.
2473.Subsections (5) and (6) explain what is meant in subsections (1)(b) and (2)(b) by becoming “liable” to make a payment.
2474.Subsection (7) preserves the rule that, if the transfer was made before the legislation was first introduced, a lease-back after that date does not activate the legislation.
Section 836: Transferor or associate becomes liable for payment other than rent
2475.This section sets out the conditions for the Chapter to apply in a case involving a payment other than rent. It is based on section 779(2), (3), (13) and (14) of ICTA. It is very similar in structure to section 835. See the commentary on that section.
2476.If, in a given case, the reader is satisfied that at least one of the conditions in section 835 is not met and at least one of the conditions in this section is not met, the reader can conclude that as this Chapter does not have effect there is no need to read any further in it.
Section 837: Relevant corporation tax relief
2477.This section lists, for the purposes of this Chapter, the deductions by way of “relevant corporation tax relief”. It is based on section 779(13) of ICTA.
2478.Paragraph (a)omits references to a profession and to a vocation where the source legislation refers to the carrying on by a company of a trade, profession or vocation. See Change 4in Annex 1. The same change is being made in sections 851, 860, 864, 880, 883 and 886.
Section 838: Relevant corporation tax relief: deduction not to exceed commercial rent
2479.This section restricts relevant corporation tax relief for payments falling within section 835(1) or 836(1) and, in certain cases, provides for such relief to be carried forward. It is based on section 779(1), (2) and (4) to (6) of ICTA.
2480.Subsection (3) puts on a clear statutory footing the practice of spreading lease rental expenditure in accordance with GAAP before applying section 779 of ICTA. This is a minor change in the law, in favour of the taxpayer. See Change 55 in Annex 1.
2481.Section 865 makes the same change in rewriting section 782 of ICTA.
Section 839: Deduction under section 76 of ICTA not to exceed commercial rent
2482.This section is a special rule restricting deductions under section 76 of ICTA (relief for certain insurance company expenses) in relation to payments falling within section 835(2) or 836(2). It is based on section 779(1), (2), (4) and (6) of ICTA.
2483.Section 76 of ICTA does not use GAAP. Accordingly, cases within section 76 of ICTA are excluded from the main rule in section 838, and sections 840 to 842 supplement this section.
Section 840: Carrying forward parts of payments
2484.This section permits amounts which have been disallowed under section 839 to be carried forward to a later period (and thus, potentially, relieved). It is based on section 779(5) and (6) of ICTA, and is the first of three sections supplementing section 839.
2485.Subsections (1) to (3) specify the conditions which must be met if this section is to apply.
2486.Subsection (4) is the main operative provision.
2487.Subsection (5) permits the section to be applied repeatedly.
Section 841: Aggregation and apportionment of payments
2488.This section is concerned with the aggregation and apportionment, for the purposes of section 839, of payments under the lease or rentcharge etc. It is based on section 779(6) of ICTA, and is the second of three sections supplementing section 839.
Section 842: Payments made for later periods
2489.This section prevents the taxpayer escaping section 839 by labelling the bunched-up payments as payments for later periods. It is based on section 779(7) of ICTA, and is the third of three sections supplementing section 839.
Section 843: Exclusion of service charges etc
2490.This section is concerned with service charges and the like. It is based on section 779(6) and (12) of ICTA. It applies for the purposes of both the main rule in section 838 and the special rule for certain insurance company expenses in section 839.
2491.Leases commonly provide for the tenant to pay the landlord not only rent but also service charges and the like, and these may be paid in a single sum; the definitions of “commercial rent” in sections 844 and 845 of this Act do not include service charges etc and so this section correspondingly excludes them from the amount with which the commercial rent is compared.
2492.Subsections (3) and (4) prevent the taxpayer escaping this Chapter by agreeing to pay an excessive amount by way of service charge. They include a minor change in the law to bring it into line with Self Assessment. See Change 56 in Annex 1.
2493.The source legislation uses the term “asset”, which is defined to exclude land and interests in land. Since many readers may find this counter-intuitive, subsection (2)(b) refers to “relevant assets”. The term “relevant asset” is defined in subsection (5). Chapters 3 and 4 of this Part also use the term “relevant asset”, for the same reason. See sections 869 and 885 of this Act.
Section 844: Commercial rent: comparison with rent under a lease
2494.This section defines “commercial rent” for the purpose of comparison with rent under a lease. It is based on section 779(8) of ICTA.
2495.Commercial rent is the rent payable under a hypothetical lease. Under subsection (3)(d), the hypothetical lease provides for rent to be payable “at an appropriate rate”. This expression is defined in subsection (4).
Section 845: Commercial rent: comparison with payments other than rent
2496.This section defines “commercial rent” for the purpose of comparison with payments other than rent. It is based on section 779(9) and (12) of ICTA.
2497.Commercial rent is the rent payable under a hypothetical lease. Under subsection (2)(b), the hypothetical lease is “a tenant’s repairing lease”. This expression is defined in subsection (3).
2498.Under subsection (2)(c), the hypothetical lease is “of an appropriate duration”. The rules for determining whether a lease is of an appropriate duration are laid down in subsection (4).
Section 846: Lease and rent
2499.This section defines “lease” and “rent” for the purposes of this Chapter. It is based on section 779(10) and (12) of ICTA.
Section 847: Associated persons
2500.This section defines “associated persons” for the purposes of this Chapter. It is based on section 779(11) of ICTA.
Section 848: Land outside the UK
2501.This section explains how expressions in this Chapter relating to interests in land in the United Kingdom and their disposition are to be interpreted in cases involving land outside the United Kingdom. It is based on section 779(12) of ICTA.
Chapter 2: New lease of land after assignment or surrender
Overview
2502.This Chapter is based on section 780 of ICTA. It deals with the situation where the existing occupier of premises incurs additional rental liability in return for the payment of a lump sum.
2503.In form, the lump sum is the consideration received for assigning the lease, usually to a charity or a pension fund, and the lease-back is at an increased rent.
2504.In substance, however, the lump sum is a loan and the additional rent represents the repayment of principal and interest.
2505.Where the Chapter applies, a proportion of the lump sum is to be treated as income of the recipient.
2506.The Chapter has the following structure.
Section 849 summarises the Chapter.
Section 850 states when the Chapter applies.
Sections 851 and 852 tax some or all of the consideration as income.
Section 853 concerns relief for rent under the new lease.
Sections 854 to 858 deal with cases in which the new lease is deemed to end.
Section 859 deals with a case in which a lease is varied to provide for increased rent.
Sections 860 to 862 are interpretative.
Section 849: Overview
2507.This section summarises this Chapter. It is new.
2508.The word “lease” appears in subsection (1) for the first time in this Chapter. On the meaning of “lease” in this Chapter, see section 862.
Section 850: New lease after assignment or surrender
2509.This section states when this Chapter applies. It is based on section 780(1), (7) and (9) of ICTA.
2510.Subsection (1) provides that five conditions must be met if the Chapter is to apply. If, in a given case, the reader is satisfied that at least one of these conditions is not met, the reader need read no further in this Chapter.
2511.Subsection (2) specifies condition A, concerning the original lease.
2512.The word “lessee” appears in subsection (2)(a) for the first time in this Chapter. On the meaning of “lessee” in this Chapter, see section 862.
2513.The expression “a deduction by way of relevant corporation tax relief” appears in subsection (2)(b) for the first time in this Chapter. It is defined in section 860.
2514.Subsection (3) specifies condition B, concerning the assignment or surrender of the original lease. Section 1166 provides that in the application of the Corporation Tax Acts to Scotland “assignment” means assignation. This gives effect to the application of section 24(5) of ICTA by section 780(8) of that Act. Section 1166 also provides that in the application of the Corporation Tax Acts to Scotland “surrender” includes renunciation.
2515.Subsection (4) specifies condition C, concerning the new lease.
2516.The expression “a person linked to L” appears for the first time in this Chapter in subsection (4)(a). It is defined in section 861. See further the commentary on section 851(6) and (7).
2517.Subsection (5) specifies condition D, concerning the relationship between the new lease and the original lease.
2518.Condition E in subsection (6) preserves the rule that, if, before the legislation was introduced, there was a legal or equitable right to the grant of a new lease, then the grant of the new lease does not activate the legislation.
2519.Subsection (7) signposts the transitory provision based on the second limb of section 780(9) of ICTA. The “relevant provisions” are the paragraphs headed “New lease of land after assignment or surrender: right to new lease existed pre-22 June 1971 ” in the “sale and lease-back etc” Parts of Schedule 2 to this Act and Schedule 9 to TIOPA.
Section 851: Taxation of consideration
2520.This section taxes, as if it were income, some or all of the consideration received by the lessee. It is based on section 780(1), (3), (3A), (7) and (8) of ICTA.
2521.Subsection (1) requires an “appropriate amount” of the consideration to be found.
2522.Subsection (1)(a) refers to the assignment of the original lease. Section 1166 provides that in the application of the Act to Scotland “assignment” means assignation. This gives effect to the application of section 24(5) of ICTA by section 780(8) of that Act. Section 1166 also provides that in the application of the Act to Scotland “surrender” includes renunciation.
2523.Subsection (2) provides that the appropriate amount is not to be treated as a capital receipt.
2524.Subsection (3) defines the appropriate amount if the term of the new lease is not more than one year. Subsection (4) defines the appropriate amount if the term of the new lease is more than one year.
2525.In a case in which the term of the new lease (a) exceeds one year and (b) is not for a whole number of years, the formula in section 780(3) of ICTA does not expressly say how to deal with parts of years. Subsection (5) makes it clear that, in such a case, a part of a year is to be taken as an appropriate proportion of a year.
2526.Subsection (6) provides that the way in which the appropriate amount is treated depends on whether certain specified conditions are met.
2527.If these conditions are met, subsection (7) treats the appropriate amount as a receipt of the trade mentioned in subsection (6)(a).
2528.Subsections (6)(a) and (7) omit references to a profession and to a vocation where the source legislation refers to the carrying on by a company of a trade, profession or vocation. See the commentary on section 837 and Change 4 in Annex 1. This Change is not made in subsection (6)(b), because a person linked to L is not necessarily a corporation tax payer.
2529.If the conditions in subsection (6) are not met, subsection (8) treats the appropriate amount as chargeable to corporation tax under the charge to corporation tax on income.
Section 852: Position where new lease does not include all original property
2530.This section deals with the position where the new lease does not include all the original property. It is based on section 780(4) of ICTA.
Section 853: Relief for rent under new lease
2531.This section makes it clear that the normal rules for tax relief apply to rent under the new lease. It is based on section 780(1) of ICTA.
Section 854: New lease treated as ending
2532.This section introduces three sections which treat the new lease as ending in certain circumstances. It is based on section 780(2) of ICTA.
2533.Subsection (2) is a tie-breaker rule. Section 780(2) of ICTA indicates that if section 780(2)(a) and (2)(b) could both apply then only one of them applies, namely the one that produces the earlier date. But section 780(2)(b) might on its own produce different dates, and it seems to take section 780(2)(b)(i) and (ii) separately (see “as the case may be”) without expressly providing which prevails. But it would be anomalous if section 780(2) included a tie-breaker rule for some but not all of the possible cases, or if it had different tie-breaker rules for different cases. Subsection (2) therefore makes it clear that the earliest date prevails in all cases.
Section 855: Position where rent reduces
2534.This section deals with the position where the rent is reduced. It is based on section 780(2) and (8) of ICTA.
2535.Subsection (1) uses the expressions “rent for a relevant period” and “following comparable period”. Subsection (2)(a), (b) and (c) define “relevant period”, “following comparable period” and “rent for a period” respectively.
2536.Subsection (2)(a) uses the expressions “rental period” and “fifteenth anniversary [of the new lease]”. These expressions are defined in subsection (2)(d) and (e) respectively.
2537.Subsection (3) supplements the definition of “rental period” in subsection (2)(d).
Section 856: Position where lease may be ended
2538.This section deals with the position where the lease has a provision for early termination. It is based on section 780(2) and (7) of ICTA.
Section 857: Position where lease may be varied
2539.This section deals with the position where the lessee has the power to vary the terms of the lease in the lessee’s favour (for example, by reducing the rent which the lessee would otherwise have to pay). It is based on section 780(2) and (7) of ICTA.
Section 858: Lease treated as ending: rentcharge
2540.This section supplements the previous three; it deals with rentcharges. It is based on section 780(2) and (7) of ICTA.
Section 859: Lease varied to provide for increased rent
2541.This section deals with a case in which a lease is varied to provide for increased rent. It is based on section 780(6) of ICTA.
2542.Subsection (1) provides that four conditions must all be met if this section is to apply.
2543.Subsection (2) specifies condition A, concerning the original lease.
2544.Subsection (3) specifies condition B, concerning the variation of the lease.
2545.Subsection (4) specifies condition C, concerning the increase in the rent.
2546.Subsection (5) specifies condition D, concerning the period within which the increased rent is to be paid.
2547.Subsection (6) is the main operative provision. Condition A in subsection (2) is the same as condition A in section 850 (new lease after assignment or surrender). In consequence of subsection (6)(a), condition B in that section is met. In consequence of subsection (6)(b), conditions C and D in that section are met. Accordingly, if conditions A to D in this section are met, conditions A to D in that section are met and this Chapter therefore has effect.
Section 860: Relevant corporation tax relief
2548.This section defines deductions by way of relevant corporation tax relief. It is based on sections 779(13) and 780(1) of ICTA.
2549.This section omits references to a profession and to a vocation where the source legislation refers to the carrying on by a company of a trade, profession or vocation. See the commentary on section 837 and Change 4 in Annex 1.
Section 861: Linked persons
2550.This section defines “a person linked to L” in this Chapter. It is based on section 780(7) of ICTA.
Section 862: Lease, lessee, lessor and rent
2551.This section concerns the meaning of “lease”, “lessee”, “lessor” and “rent”. It is based on sections 24(1) and (6) and 780(8) of ICTA.
2552.Section (3) says that “lease” does not include a mortgage. This is based on section 24(1) of ICTA as applied by section 780(8) of ICTA. In fact, section 24(1) of ICTA says that a lease includes neither a mortgage nor a heritable security. A “heritable security” is the Scottish equivalent of a mortgage, although post-1970 heritable securities take the form of a standard security. Section 1166 contains a general provision to the effect that, in the application of the Act to Scotland, “mortgage” includes the Scottish equivalents. Accordingly, subsection (3) has to be read as if it said that a lease includes neither a mortgage nor the Scottish equivalents. Subsection (3) therefore achieves the same effect as the source legislation, even though section 1166 has a definition of the Scottish equivalents that contains more detail than the words “mortgage or heritable security” in section 24(1) of ICTA. The approach is the same as that taken for income tax purposes when the definition of “lease” in section 24(1) of ICTA was rewritten to sections 364(1) and 879(1) of ITTOIA.
Chapter 3: Leased trading assets
Overview
2553.This Chapter is based on sections 782 and 785 of ICTA.
2554.This Chapter applies where a company carrying on a trade pays rent under a lease of an asset other than land or buildings and at any time before the lease was created the asset was used either (a) in that trade or (b) in another trade carried on by the person who then or later was carrying on the first trade and, in either case, when so used was owned by the company carrying on the trade in which it was used.
2555.If this Chapter applies, it provides that in computing the profits and gains of the trade the deduction in respect of a payment under the lease shall not exceed the commercial rent of the asset for the period for which the payment was made.
2556.This Chapter has the following structure.
Section 863 summarises the Chapter.
Section 864 states when the Chapter applies.
Section 865 restricts corporation tax relief and carries forward relief which has been denied.
Sections 866 and 867 supplement section 865.
Sections 868 and 869 are interpretative.
Section 863: Overview of Chapter
2557.This section summarises this Chapter. It is new.
2558.The word “lease” appears in this section for the first time in this Chapter. It is defined in section 868.
Section 864: Leased trading assets
2559.This section states when this Chapter applies to a payment. It is based on section 782(1) and (8) to (10) of ICTA.
2560.Subsection (1) introduces the three conditions relating to the application of this Chapter and explains their logical relationship.
2561.Subsection (2) specifies condition A, concerning the payment.
2562.In particular, under subsection (2)(a) the payment must be made under the lease of a “relevant asset”. The expression “relevant asset” appears in subsection (2)(a) for the first time in this Chapter. It is defined in section 869.
2563.Subsections (3) and (4) specify conditions B and C. These are two alternative conditions concerning the use to which the leased asset was put before it was leased.
2564.Subsections (2)(b), (3)(a) and (b)and (4)(c) omit references to a profession and to a vocation where the source legislation refers to the carrying on by a company of a trade, profession or vocation. See the commentary on section 837 and Change 4 in Annex 1.
2565.Subsection (5) preserves the rule that, if the lease was created before the legislation was first introduced, a lease-back after that date does not activate the legislation.
Section 865: Tax deduction not to exceed commercial rent
2566.This section restricts corporation tax relief and carries forward relief which has been denied. It is based on section 782(1) to (4) of ICTA.
2567.Subsection (3) brings the law into line with practice. See the commentary on section 838 and Change 55 in Annex 1.
Section 866: Long funding finance leases
2568.This section makes an exception for long funding finance leases. It is based on section 782(1A) of ICTA.
Sections 867 and 868: Commercial rent; lease
2569.These interpretative sections are based on sections 782(6) and (7) and 785 of ICTA.
Section 869: Relevant asset
2570.This section defines “relevant asset” for the purpose of this Chapter. It is based on the definition of “asset” in section 785 of ICTA.
2571.The source legislation uses the term “asset”, which is defined to exclude land and interests in land. Since many readers may find this counter-intuitive, this section uses the new term “relevant asset”.
Chapter 4: Leased assets: capital sums
Overview
2572.This Chapter is based on section 781 of ICTA.
2573.It deals with cases such as that of a taxpayer which, having had tax relief in respect of a payment under a lease of an asset other than land or buildings, receives or has received at any time a capital sum in respect of the lessee’s interest in the lease.
2574.If the Chapter applies, corporation tax is charged on (broadly speaking) the amount on which relief has been obtained or, if less, on the capital sum.
2575.The Chapter has the following structure.
Section 870 summarises the Chapter.
Sections 871 to 873 state when the Chapter applies.
Sections 874 to 876 concern the charge to corporation tax.
Sections 877 to 879 deal with obtaining the capital sum.
Sections 880 and 881 are about apportionment.
Sections 882 to 886 are interpretative.
Section 870: Overview
2576.This section summarises the Chapter. It is new.
2577.The expressions “capital sum” and “lease” appear in this section for the first time in this Chapter. They are defined in sections 883 and 884 respectively.
Section 871: Application of the Chapter
2578.This section introduces the five conditions relating to the application of this Chapter and explains their logical relationship. It is based on section 781(1) of ICTA.
Section 872: Payment under lease
2579.This section specifies a necessary condition (condition A) for the Chapter to apply, namely that a tax-deductible payment is made under a lease of a relevant asset. It is based on sections 781(1) and (3) and 782(1) of ICTA.
2580.The expressions “relevant asset” and “relevant tax relief” appear in subsection (1)(a) and (b) respectively for the first time in this Chapter. They are defined in sections 885 and 886 respectively.
2581.The person entitled to a deduction by way of tax relief under section 781(1)(a) of ICTA is not necessarily the person obtaining the capital sum and charged to tax under that subsection. It follows that, if the person obtaining the capital sum is charged to corporation tax, the person entitled to a deduction by way of tax relief is not necessarily a corporation tax payer. Subsection (1)(b) of this section therefore refers to “relevant tax relief”, rather than “relevant corporation tax relief”.
2582.Subsection (2) stipulates that if Chapter 3 of this Part applies to the payment then condition A is not met (and, therefore, this Chapter does not apply to the payment). For that reason, Chapter 3 appears in this Part before this Chapter, reversing the order of the source legislation.
2583.Subsection (3) similarly stipulates that if Chapter 3 of Part 12A of ITA (the income tax provision corresponding to Chapter 3 of this Part) applies to the payment then condition A is not met (and, therefore, this Chapter does not apply to the payment). Subsection (3) is unlikely to apply in practice, but omitting it would change the law to the taxpayer’s disadvantage.
2584.Subsection (4) preserves the rule that, if the lease was created before the legislation was first introduced, receiving a capital sum after that date does not activate the legislation.
Section 873: Sum obtained
2585.This section specifies four alternative additional conditions for the Chapter to apply. It is based on sections 781(1) and (9) and 783(3) of ICTA.
2586.All four of the conditions concern the obtaining of a capital sum by a person of the description specified in the condition. In particular, the person obtaining the capital sum need not be the person making the tax-deductible payment.
2587.In conditions B and C in subsections (1) and (2), the capital sum is obtained in respect of the lessee’s interest in the lease. In condition B, the capital sum is obtained by the person making the payment. In condition C, the capital sum is obtained by an associate of that person.
2588.Subsection (1)(a) is the first provision in this Chapter which refers to obtaining a sum in respect of an interest in a lease and, specifically, to obtaining a sum in respect of the lessee’s interest in a lease. The former expression is defined in section 877. The latter expression is defined in section 878.
2589.The word “associate” appears in subsection (2) for the first time in this Chapter. It is defined in section 882.
2590.In conditions D and E in subsections (3) and (4), the capital sum is obtained in respect of the lessor’s interest in the lease, or of any other interest in the asset. In condition D, the capital sum is obtained by an associate of the person making the payment. In condition E, the interest belongs to an associate of that person and the capital sum is obtained by an associate of that associate.
2591.Subsection (5) makes it clear that, for the purposes of this section, it is irrelevant when the payment is made.
2592.Subsections (6)> and (7) relate to hire-purchase agreements for plant and machinery. Subsection (6) makes an exception to conditions B and C. Subsection (7) makes an exception to conditions D and E.
Section 874: Charge to corporation tax
2593.This section imposes the charge to corporation tax on the company obtaining the capital sum. It is based on sections 781(1), (1B), (2) and (6) of ICTA.
2594.Under subsection (1), there is a charge to corporation tax on income for the accounting period in which the sum is obtained.
2595.Subsection (2) measures the amount on which tax is charged.
2596.Subsection (3) introduces four subsections limiting the effect of subsections (1) and (2).
2597.Subsection (4) caps the amount on which tax is charged.
2598.To prevent double taxation, subsections (5) and (6) ensure that once a payment (or part of a payment) has been taken into account in making a charge under this section it cannot be taken into account in making a further charge in respect of another sum.
2599.Subsection (7) is a timing rule supplementing subsections (5) and (6).
Section 875: Hire-purchase agreements
2600.This section concerns hire-purchase agreements. It is based on section 784 of ICTA.
2601.This section may be in point if section 873(6) and (7) (sum obtained: exceptions for hire-purchase agreements) do not prevent this Chapter from applying. If this Chapter applies, subsection (1) states the conditions for this section to apply.
2602.Subsection (2) requires the total to be found of:
non-tax-deductible payments under the lease; and
if the lessee’s interest in the lease was assigned to the company before it obtained the capital sum in respect of that interest, any capital payment made by the company as consideration for the assignment.
2603.This total is then compared with the capital sum. If it is equal to or greater than the capital sum, then under subsection (3) the capital sum is treated for the purposes of section 874(4) as £nil. If the total found under subsection (2) is less than the capital sum, then under subsection (4) it is deducted from the capital sum in applying section 874(4).
2604.Subsection (5) covers the special case in which the capital sum is the consideration for part onlyof the lessee’s interest in the lease.
2605.Section 784(4) of ICTA provides that:
““the amount to be deducted … shall be such proportion of the capital expenditure which is still unallowed as is reasonable” (emphasis added).”
2606.Rewriting this, subsection (5)(a) requires the unallowed amount to be reduced to a proportion which is not only reasonable but also just. This is a minor change in the law: see Change 33 in Annex 1.
2607.To prevent double relief, subsections (6) and (7) ensure that if a payment has been taken into account under subsection (2) in respect of a capital sum it cannot be taken into account in respect of another capital sum.
2608.Subsection (8) is a timing rule supplementing subsections (6) and (7).
Section 876: Adjustments where sum obtained before payment made
2609.This section provides for adjustments to be made if a capital sum is obtained as mentioned in section 873 and later a payment is made as mentioned in section 872. It is based on section 781(7) to (8A) of ICTA.
Section 877: Sum obtained in respect of interest
2610.This section is concerned with the meaning, in this Chapter, of “a sum obtained in respect of an interest in an asset”. It is based on section 783(1) and (2) of ICTA.
Section 878: Sum obtained in respect of lessee’s interest
2611.This section is concerned with the meaning, in this Chapter, of “a sum obtained in respect of the lessee’s interest in a lease of an asset”. It is based on section 783(1) and (2) of ICTA.
Section 879: Disposal of interest to associate
2612.This section determines the amount which a company is deemed to obtain if it disposes of an interest in an asset to a person who is the company’s associate. It is based on sections 781(1) and 783(4) and (5) of ICTA.
Section 880: Apportionment of payments made and of sums obtained
2613.This section provides for apportionments to be made of payments made and sums obtained. It is based on section 783(6) to (8) of ICTA.
2614.Subsection (3) requires apportionments to be not only just but also reasonable. This is a minor change in the law. See Change 33 in Annex 1.
2615.Subsections (4) and (5)omit references to a profession and to a vocation where the source legislation refers to the carrying on by a company of a trade, profession or vocation. See the commentary on section 837 and Change 4 in Annex 1. This Change is not made in subsection (2), as the reference in that subsection to “relevant tax relief” is not limited to corporation tax.
Section 881: Manner of apportionment
2616.This section provides for apportionments to be made by the tribunal in certain circumstances. It is based on section 783(9) of ICTA.
Section 882: Associates
2617.This section defines “associates” for the purposes of this Chapter. It is based on section 783(10) and (11) of ICTA.
Section 883: Capital sum
2618.This section defines “capital sum” for the purposes of this Chapter. It is based on the definition of “capital sum” in section 785 of ICTA.
2619.Paragraph (a)omits references to a profession and to a vocation where the source legislation refers to the carrying on by a company of a trade, profession or vocation. See the commentary on section 837 and Change 4 in Annex 1.
Section 884: Lease
2620.This section defines “lease” for the purposes of this Chapter. It is based on the definition of “lease” in section 785 of ICTA.
Section 885: Relevant asset
2621.This section defines “relevant asset” for the purposes of this Chapter. It is based on the definition of “asset” in section 785 of ICTA.
2622.The source legislation uses the term “asset”, which is defined to exclude land and interests in land. Since many readers may find this counter-intuitive, this section uses the new term “relevant asset”.
Section 886: Relevant tax relief
2623.This section defines “relevant tax relief” for the purposes of this Chapter. It is based on section 781(4) of ICTA.
2624.Paragraph (a) omits references to a profession and to a vocation where the source legislation refers to the carrying on by a company of a trade, profession or vocation. See the commentary on section 837 and Change 4 in Annex 1.
