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HMRC internal manual

Business Leasing Manual

Defining long funding leases: election: eligible leases: replacement plant or machinery (SI2007/304 regulation 3 condition E(d))

Lessees may wish to upgrade equipment from time to time. This is often achieved by returning the used plant or machinery to the manufacturer via the lessor and receiving upgraded replacement items in return. The existing lease is usually terminated and the upgraded plant or machinery (which will necessarily be a mixture of old and new) is leased out under a new lease.

To cater for this type of situation, a lease meets condition E if

  • the leased plant or machinery replaces plant or machinery of the same type and quantity, and
  • the plant or machinery it replaces was leased by the same lessor to the same lessee under a lease which is an eligible lease.

For example, lessor A, who has made an election, leases 5 new computers to lessee B. These leases are eligible leases. Lessee B realises he needs faster processing capacity but otherwise the computers are satisfactory. The existing leases are terminated and the computers are returned for upgrading. Lessee B enters into 5 new leases with lessor A for the upgraded computers. The computers are no longer new but the computers are of the same type and quantity as were leased under the eligible leases and so the new leases meet condition E.

Note that where a lessor leases many similar assets it may be difficult to track each individual item through the refurbishment process. However, there is no requirement for precisely the same computers to be returned to B. As long as they are of the same type and quantity the condition may be met.

The condition is not met if the manufacturer refurbishes the computers and the lessor leases them to any lessee other than B.