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HMRC internal manual

Business Leasing Manual

Introduction: anti-avoidance rules: sale of lessors and similar arrangements

Plant or machinery allowances often generate tax losses in the early years of a lease. These losses should be recovered in later years.

For example, an asset costing £100m might generate commercial profits of £10m over the life of the lease but this might be made up from tax losses of (say) £70m followed by tax profits of (say) £80m. At the rate of 30%, if the tax losses are effective the lessor gains £21m in tax relief. If the profits are taxed that relief is recovered - with tax of £24m being paid. This gives net tax payable of £3m, which is equal to the tax due on the net profits of £10m.

The trick is to ensure that the tax on the profitable part of the lease is never payable. Various schemes have been used to achieve this. The simplest was to sell the lessor company to a loss-making group as the lease became profitable. Other arrangements involving partnerships were also used: here the trick was to ensure the losses went to a profitable partner and the profits to a partner that could shelter them in some way.

These schemes and the measures introduced to counter them are described at BLM80000 onwards.