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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: Double benefit leasing - BLM61020 type arrangements

Sale and finance leaseback by a profitable business

Where in a sale and finance leaseback a person (S) sold an asset in circumstances where there was a restricted disposal value under section 222 CAA 2001 (BLM61010), the difference between the restricted disposal value and the selling price was not taxed.

To reflect this, the finance lessor’s (B) qualifying expenditure was restricted by section 224 CAA 2001 to S’s (restricted) disposal value under section 222 CAA 2001. This meant that the finance lessor could not claim capital allowances on the difference, and therefore did not get relief for it.

From a UK tax perspective the restriction on the B’s qualifying expenditure and S’s restricted disposal value cancelled each other out when the finance lessor was UK taxpaying (the amount not taxed on S matches the relief not available to B). However a tax advantage could arise when either, B was outside of the UK tax net:

* S (the lessee) got a tax free sum and allowable lease payment deductions but there was no qualifying expenditure to restrict in the finance lessor’s hands
* B (the lessor)’s income was not subject to UK tax, and
* The overseas taxing authority may only tax the interest element of the lease rentals rather than the whole lease rental
* or, B was a loss making UK business which was effectively selling its losses to a profitable lessee company

Example

* Anthony carries on a trade in the UK. He has equipment that originally cost £500,000 on which he has claimed capital allowances. He sells the equipment to B, a bank resident in Spain, for £490,000 (market value) and finance leases it back. When the equipment is sold the notional written down value is £100,000 so under section 222 CAA 2001 this is Anthony’s disposal value. Consequently, £390,000, the difference between the disposal value of £100,000 and the sale price of £490,000, is not taxable.

Accounting periods ending on or after 17 March 2004

As detailed in BLM61020, section 228B CAA 2001 sought to counter this benefit by restricting the rental deductions claimed by the lessee (BLM61040), to the finance charge element of the lease rentals.

Lease and finance leaseback involving premiums

The other arrangement referred to in BLM61020 involves lease and finance leasebacks.

A person (owner) leased plant (Head Lease) that it owned to someone who was either resident outside the UK or had losses available to shelter any profits, and then leased it back (Sub-Lease). The owner granted the Head Lease for a premium and, usually, levels of rent reflecting the payment of that premium, e.g. peppercorn rent. The rents paid by the owner when it leases back the asset under the Sub-Lease in effect repaid the premium received. The owner continued to get capital allowances on the plant and also got a deduction for the rents paid. This meant that effectively the owner got relief twice (i.e. double benefit).

Whilst the premium was chargeable to capital gains tax the part disposal rules within the capital gains legislation usually meant that there was no chargeable gain, or that where there was a gain it was covered by capital losses. So the owner did not pay much tax, if any, on the premium received.

Example

Christopher carries on a trade in the UK. He has equipment that in 1994 originally cost £1,000,000 on which he is claiming capital allowances. In 2004 he enters into an agreement with B, a bank resident in Spain, to lease the equipment to B for a premium of £500,000 and annual rents of £5 and to lease it back from B on a 10 year lease at an annual rent of £60,000. Christopher gets a Case I deduction for the rent he pays but continues to get capital allowances on the equipment that he is renting because it still belongs to him. He also pays no, or little, tax on the premium of £500,000 that he has received.

Accounting periods ending on or after 17 March 2004

As detailed in BLM61020, for accounting periods ending on or after 17 March 2004 section 228B CAA 2001 sought to counter this benefit be restricting the rental deductions claimed by the lessee under the finance leaseback, to the finance charge element of the lease rentals and the depreciation, taking the value of the plant or machinery at the beginning of the leaseback to be the restricted disposal value under section 222 CAA 2001 (See BLM61040).

From 9 October 2007 and 13 March 2008

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