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HMRC internal manual

Business Leasing Manual

HM Revenue & Customs
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Plant and machinery leasing - Anti-avoidance: Non-long funding lease rules: Double benefit leasing - background

Transactions entered into on or after 2 July 1997

The restriction at section 222 CAA 2001 (BLM61010) on the disposal value to be brought in by the seller (S) in the case of a sale and finance leaseback, enabled two types of new avoidance opportunities. These provided the lessee with the double benefit of capital allowances on the cost of the asset and also deductions for the full amount of the lease rentals paid.

This double benefit was exploited with two arrangements types; a sale and finance leaseback or a lease and finance leaseback. How these two arrangements operated is explained further at BLM61030.

The aim of the schemes was to obtain tax deductions for both the interest charge and capital repayment elements of the lease payments, whilst also retaining the benefit of the capital allowances on the cost of the asset. The commercial effect was that of a loan secured on the asset. Under the finance leaseback ‘S’ retained the beneficial ownership of the asset continued to use it and retained the risks and rewards of ownership.

Accounting periods ending on or after 17 March 2004

To counteract these arrangements the legislation at sections 228A to 228J CAA 2001 inclusive was introduced in 2004, and applies to accounting periods ending on or after 17 March 2004.

Lessee’s position

The legislation brought in relating to lessees (section 228B CAA 2001) worked by restricting the deductions from income or profits for a period of account in respect of amounts payable by the lessee under the leaseback (see BLM61040).

Lessor’s position

Lessors were taxable on their gross earnings (section 228D CAA 2001). This represented the finance charge element of the rentals, but they were also taxable on the part of the rental income which recovered the capital expenditure on which they could claim capital allowances.

Transitional provisions were included to ensure the new legislation did not apply to rents for periods before the commencement date.

Sections 228C CAA 2001 (lessee) and 228E CAA 2001 (lessor) included provisions to cover situations where leases were terminated and to ensure the tax benefits being countered were not retained (see BLM61045).

Where there is a leaseback, termination includes (Section 228H(1)):

* the assignment of the lessee’s interest
* The making of arrangements (apart from the assignment of the lessee’s interest) under which somebody other than the lessee becomes liable to make payments under the leaseback
* a variation as a result of which the leaseback ceases to be a finance lease.

From 9 October 2007 and 13 March 2008

The leaseback element of the sale / lease and finance leasebacks was brought within the long funding lease rules from 9 October 2007 and 13 March 2008 respectively (see BLM62000). This led to the repeal of sections 228D, E and F CAA 2001 and modification of other relevant sections.