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HMRC internal manual

Business Leasing Manual

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HM Revenue & Customs
Updated
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Plant and machinery leasing - Anti-avoidance: Non-long funding lease rules: Sale and finance leasebacks - Connected Parties

Definition

A sale and finance leaseback is defined at section 221 CAA 2001.

Under section 221 the following conditions must be met;

  1. B and S must enter into a relevant transaction [the ‘sale’ element].

A relevant transaction is defined by section 213 CAA 2001 as one that is either a sale of plant or machinery or a contract or assignment of the benefit of a contract, either of which provides that one party to the contract “shall or may” become the owner of the plant or machinery on performance of the contract.

Within this definition, S refers to the seller, assignor or the party who enters into a contract with another person whereby the party may become the owner of the asset under a “shall or may” contract and B refers to the purchaser, assignee, or recipient of the plant or machinery on performance of the contract.

Commercially, under a sale and finance leaseback S is the user of the asset and B is the finance provider.

  1. After the date of the relevant transaction:

the plant or machinery continues to be used for the purposes of a qualifying activity carried on by S or by a person (other than B) who is connected with S, or

the plant or machinery is used for the purposes of a qualifying activity by S, or a person connected to S (other than B), without having been used since that date for any other qualifying activity except that of leasing the plant or machinery, or

the plant or machinery is used for the purposes of a non-qualifying activity by S or a person connected to S (other than B) without having been used since that date for a qualifying activity other than leasing the plant or machinery,

and

  1. it is directly or indirectly as a consequence of the plant or machinery being leased under a finance lease that it is available to be so used.

Sale and finance leasebacks before 12 March 2008

The definition of ‘sale and finance leaseback’ in section 221 CAA 2001 was used for the anti-avoidance legislation at sections 222 to 228 CAA 2001 for transactions entered into before 9 October 2007. However from 9 October 2007 sections 222, 223, 224, & 226 were repealed by FA 2008.

Sale and finance leasebacks on or after 12 March 2008

From 12 March 2008 changes to the long funding lease rules means that in most sale and finance leasebacks, the leaseback cannot be a short lease (BLM20530). This would result in the lessor (B under the finance leaseback) being unable to claim capital allowances because it is a long funding finance lease and therefore the entitlement to capital allowances rests with the lessee, S, under the finance leaseback.

Sale and finance leasebacks on or after 22 April 2009

It is not uncommon for a group to use a central purchasing company to make purchases of plant or machinery. Where this happens, assets may be leased to a connected operating company. In such a case, a sale and finance leaseback by the group asset owner that involved a leaseback to the operating company was not caught by section 221. This was because the operating company, a person connected to S, continued to use the plant or machinery for their qualifying activity but, prior to 22 April 2009, section 221 only covered continuing use under the leaseback by S themselves.

Section 221(1)(b)(i) was amended with effect from 22 April 2009 to refer to use for the purposes of either S, or a person (other than B) who is connected with S.