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HMRC internal manual

Business Leasing Manual

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HM Revenue & Customs
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Taxation of leases that are not long funding leases: finance lessees: importance of lease term: no secondary period: leases of fixtures

Under general law, plant or machinery fixtures belong to the freeholder (see Melluish v BMI, House of Lords, 68 TC 1). Thus, a finance lessor will not own any fixtures it leases out (unless it buys the freehold of the land on which they stand, which is unusual). But the lessor may be able to claim capital allowances for the plant or machinery via an election under CAA01/S177 with the lessee (see CA26200). In such cases it might be possible, from a commercial angle, to provide neither for secondary periods nor for a rental rebate. This is because the lessee owns the freehold (or a long lease) and therefore the plant or machinery affixed to that land. The lessee therefore already has full economic title to the asset for as long as required and so does not need secondary periods or rebates. At the end of the primary period the lessee retains the asset.

In Tax Bulletin (Issue 15) of February 1995 at paragraphs 8.7/8.8 we said that we reserve the right to challenge cases where fixtures leases are, or turn out to be, of short duration if rentals are not spread over the life of the asset. One (of several) arguments in these cases if our view is not accepted is that the rental payments are capital because they secure an enduring advantage for the lessee - an advantage which runs well beyond the end of the primary period.