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HMRC internal manual

Business Leasing Manual

Taxation of leases that are not long funding leases: lease and leaseback: without a premium

In a typical tax-driven transaction, an overseas business grants a typical finance lease to a UK bank (or other lender) for rents. The bank then grants a typical finance lease back to the overseas business.

If that were all there were to the arrangements the rentals would cancel each other out and the arrangement would be commercially pointless. However the UK bank agrees to pay its rentals up-front (suitably discounted to reflect early payment). This turns the arrangements, commercially, into a loan (the head lease) repaid by the sub-lease.

The UK bank hopes to obtain deductions for the lease rentals it pays to the overseas business but to benefit from CAA01/S228D, which restricts the amount of rental income that is taxed.

HMRC have not conceded that these arrangements have the effect the promoters claim and any such arrangements should be referred to CTIS (CT&BIT) for advice before detailed enquiries are made.

However, to ensure these schemes could not be used in future they were blocked by FA07/Sch5/Para16. This legislation also affects existing schemes.

Paragraph 16 means that s.228D does not apply to rentals receivable after 6 December 2006, whether they are receivable under existing arrangements or not.