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HMRC internal manual

Business Leasing Manual

Plant and machinery leasing - Anti-avoidance: Non-long funding lease rules: Sale and finance leasebacks by loss makers

Transactions entered into before 2 July 1997

Where the market value of an asset at a point in time was higher than it’s written down value, a seller (S) in a loss-making situation was able to sell an asset used in its business to a finance lessor (B), such as a bank, and finance lease it back. Any balancing charge arising on the sale was covered by losses of S.

B would then be able to claim capital allowances based on the market value purchase price, which was higher the written down value of the asset, so effectively using the losses of S to ‘rebase’ the capital allowances while use of the asset was retained by S through the finance leaseback.

Transactions entered into on or after 2 July 1997

Legislation introduced to CAA 1990 in 1997, applicable to transactions entered into on or after 2 July 1997, addressed this problem by restricting the buyer’s qualifying expenditure under a sale and finance leaseback. This legislation was rewritten to section 224 CAA 2001.

There is a sale and finance leaseback if a person carrying on a qualifying activity sells an asset used in that qualifying activity and leases it back under a finance lease. The full definition is at section 221 CAA 2001 (BLM61005).

Where there was a sale and finance leaseback, the seller’s disposal value (section 222 CAA 2001) and the buyer’s qualifying expenditure (section 224 CAA 2001) were restricted to the lowest of:

* the actual disposal value
* market value
* the notional written down value of the seller’s capital expenditure
* the notional written down value of the capital expenditure incurred by anyone connected with the seller

Transactions entered into on or after 9 October 2007

Sections 222, 223, 224, & 226 CAA 2001 were repealed by FA 2008 with effect from 9 October 2007, with most sale and finance leasebacks entered into on or after that date coming within the long funding finance lease rules (section 70I(10) CAA 2001) see BLM62000. Section 226 CAA 2001 will continue to apply to a (subsequent) sale on or after 9 October 2007 where there was a sale and leaseback of the asset before that date.