Restoring plant and machinery leases to pre COVID-19 treatment
Published 3 March 2021
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This publication is available at https://www.gov.uk/government/publications/restoring-plant-and-machinery-leases-to-pre-covid-19-treatment/restoring-plant-and-machinery-leases-to-pre-covid-19-treatment
Who is likely to be affected
Lessees, eligible to claim capital allowances where plant or machinery is leased under a long funding operating lease which is extended due to a change in consideration due under the lease, due to COVID-19.
Lessors and/or Lessees eligible to claim capital allowances, where plant or machinery is leased under a short lease which is extended due to a change in consideration due under the lease, due to COVID-19 and the ‘new’ lease is a long funding lease.
General description of the measure
This measure turns off capital allowances anti-avoidance legislation, normally triggered when the term of the following plant or machinery leases is extended, when that extension to the lease term is related to COVID-19 for:
- all long funding operating leases
- short leases, where the ‘new’ period (the date of the change in consideration which results in the extension of the lease to the end of the extended period) would be of sufficient length to create a long funding lease
Either party to the lease will be permitted to disregard this measure by election, which will be binding on both parties.
The measure will cover COVID-19 related lease extensions, where anti-avoidance legislation is triggered, from 1 January 2020 to 30 June 2021.
Policy objective
This measure is designed to:
- prevent lessors and lessees unknowingly triggering the anti-avoidance legislation
- restore leases to their original position, as agreed between the lessor and lessee, returning economic certainty to the lease, easing unexpected cash flow issues
- reduce the administrative burden, for those lessors and lessees caught by the anti-avoidance legislation, of renegotiating leases and/or recalculating capital allowances
Background to the measure
The Finance and Leasing Association (FLA) approached HMRC with concerns that some plant or machinery leases would be adversely affected by the government’s anti-avoidance legislation, and common law.
Following extensive research, HMRC concluded that common law would only apply to create new leases where there were fundamental changes to the terms of the lease, which would be beyond the scope of a lease extension caused by COVID-19.
The remaining issue, the subject of this measure, relates to specific circumstances under which HMRC anti-avoidance legislation creates unexpected outcomes for many lessors and lessees.
No ‘open’ consultation was undertaken due to time constraints. HMRC considers that there was sufficient coverage of the issue as the FLA represent almost 40% of UK lessors. As the measure is restorative in nature with no negative impacts for customers, no adverse response to the measure is anticipated.
Detailed proposal
Operative date
The measure will have effect in relation to leases caught by anti-avoidance legislation where the date of the change in consideration for a lease which results in an extension to the lease lies between 1 January 2020 to 30 June 2021 and is for reasons related to COVID-19.
Current law
The current law is at S70YB and S70YC, in Part 2, Chapter 6A (interpretation of provisions about long funding leases) of CAA 2001.
Proposed revisions
Primary legislation will be introduced in Finance Bill 2021.
S70YCA CAA 2001 will work to disapply S70YB(1) and S70YC(1) where on or after 1 January 2020, there is (or was) a change in the payments under the lease that would have been payable on or before 30 June 2021; the effect of the change is that the term of the lease is extended and anti-avoidance legislation at section 70YB(1) or 70YC(1) would apply.
The change must have been made for a reason related to COVID-19 and after the change the consideration under the lease must be substantially the same as, or less than, the consideration under the lease before the change.
This will automatically disapply anti-avoidance legislation for those lessors and lessees unintentionally caught by S70YB and S70YC CAA 2001 following changes in consideration payable under the lease due to COVID-19 resulting in an extension to the lease, returning lessors and lessees to their original intended contractual position. It also prevents those unaware of the anti-avoidance rules accidentally falling foul of them.
This legislation will only apply where there is no other substantive change to the terms of the lease and the lessor and lessee have not made any arrangement in connection with any changes to capital allowances relating to the lease arising as result of the extension of the lease due to COVID-19.
This is to ensure no other amendments are made at the same time which would, but for this legislation, have triggered the anti-avoidance rules.
It also disapplies the legislation where parties to a lease have already made provision for the anti-avoidance rules, so as not to undo their work.
Either party has the option to elect to disapply S70YCA, and that election is binding on both parties.
This allows any party who will be disadvantaged by this legislation to restore the strict legal position.
The government will be able to amend the end date of this legislation via secondary legislation to adapt to future circumstances as they become clearer.
Summary of impacts
Exchequer impact (£m)
| 2020 to 2021 | 2021 to 2022 | 2022 to 2023 | 2023 to 2024 | 2024 to 2025 | 2025 to 2026 |
|---|---|---|---|---|---|
| Nil | Nil | - | - | - | - |
This measure is not expected to have an Exchequer impact.
Economic impact
This measure is not expected to have any significant economic impacts.
Impact on individuals, households and families
This measure is not expected to impact on individuals. This measure is not expected to impact on family formation, stability or breakdown.
Equalities impacts
It is not anticipated that there will be impacts on groups sharing protected characteristics.
Impact on business including civil society organisations
This measure is expected to have a negligible impact on a small number of businesses who are eligible to claim capital allowances where plant or machinery is leased either under a long funding operating lease which is extended, or a short lease which is extended creating a long funding lease. They will file the capital allowances aspects of their returns as they had originally expected.
One-off savings could include not having to renegotiate contracts, not having to recalculate capital allowances, and the saving of the corresponding costs of training or upskilling of staff to perform the calculations arising as a result of this change.
Continuing savings could include not having to do more calculations, as a result of this change.
This measure is expected overall to improve businesses experience of dealing with HMRC because lessors would not usually expect their goodwill gesture intended to assist lessees in this time of financial difficulty, to trigger anti-avoidance legislation.
This measure is not expected to impact civil society organisations.
Operational impact (£m) (HMRC or other)
Operational impacts for HMRC for this change are estimated to be negligible.
Other impacts
Other impacts have been considered and none has been identified.
Monitoring and evaluation
The measure will be kept under review through communication with affected taxpayer groups.
Further advice
If you have any questions about this change, please contact Lesley Herbert (CS&TD) on Telephone: 03000 537124 or email: lesley.herbert@hmrc.gov.uk team mailbox address.