Introduction: anti-avoidance rules: disposal of income streams
The Rent Factoring legislation was introduced to address avoidance involving the disposal of rental streams. In some circumstances the ‘consideration’ received on the disposal of a rental stream was not taxable, or the transaction was structured so that the sum was not brought into charge as income (e.g. a capital sum). Where the sum was capital it could effectively escape taxation, either because of costs that could reduce the gain significantly, or because of the availability of capital losses.
Company disposals of income streams are now brought into charge by the Factoring of Income legislation at S752-757 of CTA 2010; non-corporate disposals are covered at S809AZA-809AZG of ITA 2007. The legislation ensures that,
- where the right to income (including but not limited to all or part of the rental stream arising from a lease of plant and machinery) is sold, or otherwise transferred to another person, and
- the consideration received for this transfer is not otherwise brought into account as income (s754 CTA 2010 and s809AZC ITA 2007)
the consideration received is then brought into account as income (s753(2)(a) CTA 2010 and s809AZB(2)(a) ITA 2007).
However, if there is no consideration received, or if it is substantially less than the market value of the right to the income at the point of transfer, then the market value of the right at the time of transfer will be brought in instead (s753(2)(b) CTA 2010 and s809AZB(2)(b) ITA 2007).
Businesses may sell the underlying asset as well as the right to receive the rentals. Where this happens, provided all the consideration for the transfer is brought into account as a capital allowances disposal receipt, no further charge arises under s752(1)(b) CTA 2010 or s809AZA(1)(b) ITA 2007.
2 July 2004 to 21 April 2009
Prior to the current Factoring of Income legislation, s134 of FA 2004 brought in specific legislation at s785A ICTA 1988 for the Rent Factoring of Leases of Plant and Machinery for transactions entered into on or after 2 July 2004.
Transfers made on or after 2 July 2004
Prior to the introduction of the Factoring of Income legislation, the Rent Factoring legislation at s.785A ICTA 1988, that was specific to the transfer of rental streams from plant and machinery leases, applied to such arrangements entered into between 2 July 2004 and 21 April 2009. Its aim was to combat avoidance where a lease income stream was transferred so that it was no longer taxable on the lessor.
Where the right to receive all or part of the rental stream arising from a lease of plant and machinery was sold, or otherwise transferred to another person (s785A(1) and (3)), and the consideration received for this transfer was not otherwise brought into account as income (s785A(1)(d)(i)), section 785A acted to bring the proceeds into account as income under s785A(2).
However, where the business had sold, or otherwise transferred, the underlying asset then provided all the consideration for the transfer had been brought into account as a capital allowances disposal receipt no further charge arose under section 785A (s785A(1)(d)(ii)).
Transfers made on or after 12 March 2008
S785A ICTA 1988 was amended for transactions entered into on or after 12 March 2008 to cover transfers that were
- for value that did not amount to consideration receivable:
S785A(2) was amended to bring in the ‘market value of the rights transferred’ rather than ‘consideration for the transfer’ to put beyond doubt the value that was to be brought in as income.
S785A(1d) was removed to enable the changes within S785(2) and substantively rewritten as S785A(2A).
- structured in such a way that they were not ‘to another person’;
S785A(5ZA) was introduced so that for the purposes of s785A ‘another person’ included any person in which P has an interest. This specifically included any partnership of which P is a member, and the trustees of any trust of which P is a beneficiary, to put beyond doubt a transfer had taken place for these purposes.
- undertaken shortly before the lessor migrates from the UK and before the consideration was receivable.
S785A(2)(c) was amended so that the (now) market value of rights transferred was brought into account at the time of the transfer rather than in the period it is receivable.
Transfers made on or after 21 July 2008
Due to measures brought in to counter leasing avoidance schemes involving premiums (see BLM62320), S785A(5B) was introduced to ensure that where those provisions apply then there will be no liability under S785A ICTA 1988.
Transfers made on or after 22 April 2009
The Rent Factoring of Plant and Machinery legislation was incorporated into the Factoring of Income legislation, at paragraphs 1 to 6 Schedule 25 FA 2009 for company transfers and to S809AZA-809AZG ITA 2007 for non-corporate transfers. The effect of S785A ICTA 1988 is substantively replicated in this section, but the format of the legislation was changed.
Company transfers in accounting periods ending on or after 1 April 2010
The Factoring of Income legislation for company transfers was re-written to S752-757 CTA 2010 for accounting periods ending on or after 1 April 2010.