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HMRC internal manual

Business Leasing Manual

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HM Revenue & Customs
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Taxation of long funding leases: Lessees: Limit on deductions

CTA10/S379-380 restricts the deductions that may be allowed in computing profits in the case of a lessee under a long funding operating lease.

The amount of the restriction is based on the difference between

  • starting value (see below), and
  • the amount which, at the commencement of the term of the lease, is expected to be the market value of the plant or machinery at the end of the term of the lease.

The resulting value is referred to as the expected gross reduction over the term of the lease and is apportioned to each period of account on a time basis.

The starting value is usually the market value of the plant or machinery at the commencement of the term of the lease.

However, if the lessee

  • has the use of the plant or machinery as a result of having incurred expenditure on its provision for purposes other than those of a qualifying activity, and
  • brings the plant or machinery into use for the purposes of a qualifying activity on or after 1st April 2006,

then the starting value is the lower of

  • first use market value, and
  • first use amortised market value.

First use market value

means the market value of the plant or machinery when it is first used for the purposes of the qualifying activity.

First use amortised market value

means the value that the plant or machinery would have at the time when it is first brought into use for the purposes of the qualifying activity, but on the assumption that the market value of the plant or machinery at the commencement of the term of the lease had been written off on a straight line basis over the remaining useful economic life of the plant or machinery.

Example

On 1 July 1998 an item of plant was bought for the equivalent of £10m by Lessor SA, a French resident. The plant was expected to have a useful life of 25 years and was leased out on the day it was acquired under a lease with a primary term of 20 years.

Lessor SA moves to the UK, becoming resident on 1 July 2008 and beginning to carry on a qualifying activity at that time.

On the basis that the plant had an expected useful life of 25 years, straight line depreciation would have been £400,000 a year. The plant is 10 years old on 1 July 2008 and therefore, £4m would have been written off. The first use amortised value is therefore £6m.