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HMRC internal manual

Business Leasing Manual

Taxation of leases that are not long funding leases: sale and leaseback: Sale and finance leasebacks on or after 9 October 2007

Following the introduction of S228A to S228J of CAA 2001 by FA 2004 (see BLM35025) new schemes arose that continued to allow the seller to benefit from the disposal value restriction in S222, but avoided the application of S228B (see BLM61040). This meant that S228B’s restriction of the deductions that could be claimed by the lessee under the leaseback, that was intended to recover any tax-free sum and remove the double benefit, was not being effective.

Due to the ongoing avoidance around the restricted disposal values S222 was repealed completely for sale and finance leaseback transactions occurring on or after 9 October 2007.

As S222 was repealed, the anti-avoidance sections at S228D, S228E were no longer needed and were also repealed. S228F was brought within S228B and S228C and these sections then became applicable only for lease and finance leaseback transactions.

To prevent the resurfacing of this type of avoidance, sale and finance leasebacks were taken within the long funding lease rules from 9 October 2007, subject to the election and exceptions outlined below.

Consequential amendments effective from 9 October 2007 were also made as a result of S70I(11) . These included S228G to S228J, S217, S218 CAA 2001 and amendments made to S774E ICTA 88.

Sale and finance leasebacks entered into on or after 9 October 2007

From 9 October 2007 sale and finance leasebacks are, subject to some exceptions, brought within the long funding lease rules. CAA2001/S70I(10) stipulates that any finance lease within a sale and finance leaseback is not a short lease so is no longer automatically exempt.

This means that all funding leases (CAA2001/s70J) within a sale and finance leaseback, other than those specifically excluded as background plant or machinery for a building (CAA2001/s70R), or plant or machinery of a low percentage value leased with land (CAA2001/s70U), will fall to be treated as long funding leases.

However, CAA2001/s70I(11) was introduced at the same time. This allows an election made by both parties (the lessor and the seller/lessee) to prevent S70I(10) from applying, if the conditions of CAA2001/S227(2) are met. This provision was introduced to allow businesses to finance, or refinance, newly acquired assets while still allowing the financing lessor to claim capital allowances, thus preserving the benefit of leasing for commercial financing transactions. The election can only be made in cases where the lease would not be a long funding lease had the lessor acquired the plant and machinery other than by a sale and finance leaseback.