Policy paper

Corporation Tax and Income Tax: capital allowances and leasing - anti-avoidance

Published 25 November 2015

Who is likely to be affected

Businesses who seek to obtain tax advantages by either:

• manipulating disposal values leading to excess capital allowances
• receiving a consideration in a non-taxable form in return for agreeing to take over tax deductible lease payments

General description of the measure

This measure is in 2 parts:

• firstly, it prevents a person using an artificially low disposal value for capital allowances purposes on the disposal of plant or machinery where tax advantage is one of the main purposes of the arrangements which include that disposal
• secondly, it brings into tax as income, if not already so taxed, any consideration receivable by a person, or a connected person, for agreeing to take over payments under a lease for which that person can claim tax deductions

Policy objective

This measure protects the UK Exchequer by ensuring that businesses cannot use artificial and contrived arrangements to circumvent the rules relating to capital allowances and deductions for lease payments. This measure supports the government’s objectives to have a fair tax system for all and to tackle avoidance in the tax system. It levels the playing field between businesses that enter into avoidance arrangements exploiting the relevant tax rules and compliant businesses.

Background to the measure

This measure was announced at Autumn Statement 2015.

Detailed proposal

Operative date

For both parts the measure will apply to appropriate transactions that take place on or after 25 November 2015.

Current law

The capital allowances code for plant and machinery in Part 2 Capital Allowances Act 2001 (CAA) defines different types of ‘disposal events’ and, for each such event, how the disposal value is to be calculated. The main legislation is in Section 61 CAA but other sections apply in different circumstances, for example in relation to plant or machinery under a Hire Purchase agreement either Section 68 or, if appropriate, Section 229 CAA applies. There is a list of these other sections in Section 66 CAA.

Part 20 Corporation Taxes Act 2010 (CTA 2010), and equivalent provisions within Part 13 Income Taxes Act 2007 (ITA 2007), contain certain tax avoidance rules involving leasing. At present these either restrict losses or tax certain capital payments as income but do not cover the type of arrangement now being addressed.

Proposed revisions

Legislation will be introduced in Finance Bill 2016 to amend Part 2 Chapter 17 CAA (Other Anti-Avoidance) so that it is capable of adjusting the disposal value of the person making the disposal of the plant or machinery as well as qualifying expenditure of the person acquiring it. Section 215 CAA will be amended so that it applies where the main purpose, or one of the main purposes, of the relevant transaction, or a scheme or an arrangement of which it is part, is to enable a person to obtain a tax advantage in the form of a reduced or no balancing charge or an increased allowance. Where the relevant conditions are met the disposal value is to be adjusted in a just and reasonable manner by reference to payment received attributable to the arrangements not otherwise taken into account in disposal value. Payment will be widely defined so as include any form of value receivable.

Secondly, for Corporation Tax purposes new Chapter 3 (‘Consideration for taking over payment obligations as a lessee taxed as income’) will be inserted into Part 20 CTA 2010. Chapter 3 will provide that where a company becomes entitled to tax deductions as a result of taking over obligations under a lease of another person, then the company will always be chargeable to tax on any consideration received. The legislation will apply to any situation and by whatever method the company takes over those lease obligations. Consideration will be defined widely to include any payment or valuable benefit referable, directly or indirectly, to the agreement. There will be parallel provisions for income tax purposes, where the person taking over the lease obligations is not a company, in Part 13 ITA 2007.

Summary of impacts

Exchequer impact (£m)

2015 to 2016	2016 to 2017	2017 to 2018	2018 to 2019	2019 to 2020	2020 to 2021
+5	+25	+40	+30	+20	+20

These figures are set out in Table 3.1 of Autumn Statement 2015 and have been certified by the Office for Budget Responsibility. More details can be found in the policy costings document published alongside Autumn Statement 2015.

Economic impact

This measure is not expected to have any significant macroeconomic impacts.

Impact on individuals, households and families

This measure is not expected to have any impacts on individuals, households or family formation stability or breakdown.

Equalities impacts

This measure is not expected to have an impact on groups sharing protected characteristics.

Impact on business including civil society organisations

This measure will have no impact on businesses and civil society organisations who are undertaking normal commercial transactions; it will only impact on businesses that are using avoidance schemes affected by this measure.

Operational impact (£m) (HM Revenue and Customs (HMRC) or other)

There will be no significant impacts for HMRC.

Other impacts

Other impacts have been considered and none have been identified.

Monitoring and evaluation

The measure will be monitored through the Disclosure of Tax Avoidance Schemes requirements and risk assessment of the tax returns of persons engaged in leasing either as lessor or lessee.

Further advice

If you have any questions about this change, please contact Paul Hindley on Telephone: 03000 585576 or email: paul.hindley@hmrc.gsi.gov.uk.

Declaration

David Gauke MP, Financial Secretary to the Treasury has read this tax information and impact note and is satisfied that, given the available evidence, it represents a reasonable view of the likely costs, benefits and impacts of the measure.