Defining long funding leases: basic definition: rules applying to lessees (CAA01/S70H)
Before 13 December 2007
As mentioned at BLM20115, lessees are under no obligation to treat a lease as a long funding lease if they do not wish to do so. A lessee can choose not to be within the long funding lease regime by making a return on the basis that the lease is not a long funding lease.
This choice must be made for what the legislation refers to as ‘the initial period’. This is defined as
“the first accounting period or, as the case may be, tax year in which there is a difference in the amount of the profits or losses falling to be shown in the return, according to whether the lease is a long funding lease or not.” (S70H(3))
This rule relies on the tax treatment differing between the two types of lease to establish whether a lease is a long funding lease or not. Broadly speaking, if a return is made early on in the life of a lease to the effect that it is a long funding lease, then that will ‘fix’ it as a long funding lease. But if returns are not made on that basis it will ‘fix’ it as a lease that is not a long funding lease.
The ‘initial period’ is defined in the way it is because the differences may show up at or before commencement. For example
- where a lease is an operating lease, the difference in tax treatment begins at commencement when the restriction under ICTA88/S502K (or ITTOIA05/S148J begins to have effect (BLM42040) even if no capital allowance claim is made at that point
- where a lease is a finance lease, the difference in tax treatment may begin before commencement because, if any rentals exceed the finance charge, they will not be allowable - ICTA88/S502I (or ITTOIA05/S148H) (BLM42025).
A lessee cannot make a claim for relief under the error or mistake relief provisions on the grounds that a return that shows that a lease should be taxed as a long funding lease or not was made in error or by mistake (CAA01/S70H (2)).
Once a lessee has made a return on the basis that a lease is a long funding lease then that establishes the nature of the lease in the lessee’s hands. This is subject to the lessee’s right to amend its return within the time limits for doing so. This assumes, of course, that the necessary conditions for the lease to be treated as a long funding lease are satisfied.
On or after 13 December 2007
Due to avoidance arrangements involving the mismatch of lease chains (see BLM63010), Section 70H was amended, via ss.(1A) and (1B), for lease chains where the sub-lease is a long funding lease. Subsection 1A stops section 70H from applying where at any time in the relevant period the lessee is also a lessor under a long funding lease and the sub lease was entered into on or after 13 December 2007. The ‘relevant period’ is defined in subsection 1B.
On or after 13 November 2008
Section 70H(1C) was brought in with the introduction of section 70DA, which limits lessee’s allowances in certain situations (see BLM62110), to ensure that section 70H did not act against section 70DA. It acts to disapply section 70H(1) to a lease where paragraphs (a) and (b) of subsection 70DA(1) are satisfied. This is where the asset has been transferred from the transferor to a transferee (section 70DA(1)(a)) and at any time after that transfer the asset is then available to be used under a plant and machinery lease by that transferor or by any party connected with them, other than the transferee (section 70DA(1)(b)).
It does not matter whether the transferee is connected to the transferor, but if the lease back from the transferor is to the transferee, or to someone connected to them then section 70H(1) is disapplied for that leaseback by section 70H(1C).