Taxation of long funding leases: basic principles: disposal of plant and machinery in connection with long funding leases
Lessor on granting long funding lease - disposal value at lease commencement
The lessor under a long funding lease is not entitled to claim capital allowances on the leased plant or machinery. Where such a lessor leases an existing asset on which they have previously claimed capital allowances they are deemed to have disposed of the asset.
Section 61(1)(ee) provides that the commencement of a lease of plant or machinery under a long funding lease is a disposal event.
The disposal amount to be brought in under S61(2) remains subject to the cap to original cost under S62(1). The amount also depends upon whether the lease granted is a long funding finance or a long funding operating lease. Due to a significant amount of avoidance in this area (seeBLM62200), a number of changes have been made to S61.
Long funding operating lease
The disposal value is the market value of the plant or machinery at the commencement of the term of the lease (item 5B of the Table at S61(2)).
Long funding finance lease
The amount of the disposal value (item 5A of the Table at S61(2)) depends upon the date of the deemed disposal.
Disposal events between 1 April 2006 and 12 December 2007
The disposal value is the amount that falls to be recognised as the lessor’s net investment in the lease in their accounts, prepared in accordance with GAAP, on the date this first falls to be recognised. Where accounts are not prepared, or are not in accordance with GAAP, then the amount is the amount that would appear in such accounts.
Disposal events between 13 December 2007 and 11 March 2008
The disposal value is the amount that falls to be recognised as the lessor’s net investment in the lease. However, the amount of the net investment in the lease is adjusted so that any rentals under the lease made (or due) on or before the relevant date are treated as made (and due) on the day after that date, and so would fall to be recognised within the lessor’s net investment in the lease if accounts were prepared in accordance with GAAP on the relevant date.
The relevant date is the date on which the lessor’s net investment in the lease is first recognised in the books or other financial records of the lessor. (see BLM62330 for avoidance)
Disposal events between 12 March 2008 and 12 November 2008
The starting point for the disposal value is the same as for disposals between 13 December 2007 and 11 March 2008.
However, in addition S61(8) and (9) of CAA 2001 were introduced. These sections act to treat the lessor as having no liabilities on the relevant date (if the effect of doing so would be to increase the disposal value). This means that in cases where the lessor has funded the asset purchase with a loan, then the loan (or any other liability) may be disregarded in arriving at the net investment in the lease.
Disposal events on or after 13 November 2008
From 13 November 2008 the disposal value no longer relies on an accounting concept of ‘net investment in the lease’. The disposal value brought in by the lessor on the commencement of a long funding lease is now determined by the greater of the market value of the plant or machinery at the commencement of the term of the lease and the qualifying lease payments.
Qualifying lease payments are defined as the minimum payments under the lease (including any initial payment) but excluding amounts included therein for the gross return on the investment under generally accepted accounting practice, charges for services and qualifying UK or foreign tax (withinS70E CAA) to be paid by the lessor, CAA/S61(5A)
The avoidance is set out at BLM62250.