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HMRC internal manual

Business Leasing Manual

Taxation of long funding leases: Long funding lessors: Anti-avoidance provisions - Sections 370-371

Sections 370-371 CTA 2010

This section prevents sections s360 to s369 from applying to restrict the taxable element of long funding lease rentals to the finance charge element only (and give certain deductions against such income), where any part of the expenditure incurred by the company on the acquisition of the plant or machinery for leasing under the lease is (apart from those sections) allowable as a deduction in calculating its profits or losses for the purposes of corporation tax.

S370(3) allows for the possibility that the leased plant and machinery is acquired otherwise than as trading stock. If in these circumstances the asset is leased out under a long funding lease, sections 360-369 will apply initially. However, should the plant and machinery be transferred to trading stock at a later date, then Section 370(3) and Section 371 will apply to stop the application of the sections and adjust the lessor’s income on a just and reasonable basis.

Example 

Assume that an asset costing £1,000 is leased in full payout terms over 10 years for £135 a year and is appropriate to trading stock at the end of year 3. The rentals might comprise:

  ‘Finance charge’ element (£) ‘Repayment’ element (£)
     
Total for years 1 - 3 150 250
Total for years 4 - 10 200 750
Total for all years 350 1000

The effect of CTA/S360 is that in years 1-3 only £150 of the rentals is taxed.

If the asset is appropriated to trading account at the end of year 3, when its value is £800 (and so £800 is available as a deduction in computing the profits of the trade), taxing the rentals in years 4 to 10 would be insufficient. This is due to the £800 deduction not being matched by taxing the repayment element of rentals of £750. Assuming not other issues need to be taken into account, it might be just and reasonable to tax an additional £50 (£800 - £750) in year 3.

If, however, the asset is appropriated when its value is only £650 then taxing the full £750 ‘repayment’ element of the rentals is unlikely to be just and reasonable. Instead, and again assuming no other issues need to be taken into account, it might be just and reasonable to tax £650 of the £750 ‘repayment’ element on a pro-rated basis over the remainder of the lease term.

In both cases, the finance charge element of the lease rentals remains taxable in full.

For accounting periods ending before 1 April 2010

This legislation was previously located at s.502GA ICTA 88 and stopped the application of S502B to S502G ICTA 88. It was effective for leases entered into on or after 9 October 2007.