BLM61045 - Plant and machinery leasing - Anti-avoidance: Non-long funding lease rules: Restriction on lessee deductions - termination of lease

Accounting periods ending on or after 17 March 2004

For accounting periods ending after 16 March 2004 when a person entered into a sale and finance leaseback, or lease and finance leaseback, the legislation in section 228B CAA 2001 (BLM61040) recovered any tax-free sum received over the life of the leaseback.

Terminating a leaseback early would mean the whole of any tax-free sum may not be recovered. Accordingly the legislation in section 228C CAA 2001 recovered the balance of the tax free sum if a leaseback terminated early.

If a leaseback terminated early the lessee’s income or profits for the accounting period in which the lease terminated should have been increased by the following amount:

Net consideration x (Current book value/Original book value)

This recovered the rest of the tax-free sum.

  • The net consideration was the difference between the amount the seller received for entering into the sale and finance leaseback and the restricted disposal value that was brought to account (the tax-free amount that the seller received)
  • If there was a lease and finance leaseback the net consideration was any consideration given for the grant of the lease (section 228F(3) and (6)(b) CAA 2001)
  • The current book value was the net book value of the leased plant and machinery immediately before the termination
  • The original book value was the net book value of the leased plant or machinery at the beginning of the leaseback.
  • In a lease and leaseback case the charge under section 228C CAA 2001 does not affect the tax treatment of any refund of rentals on termination. A refund of rentals is taxed in full even if there are amounts owing to the lessor.

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For transactions entered into on or after 9 October 2007

As noted in (BLM61020), further avoidance arrangements led to most sale and finance leasebacks entered into on or after 9 October 2007 being moved within the long funding lease rules so that the finance leaseback was not a short lease. From 13 March 2008 this treatment was extended to lease and leasebacks as well, see BLM62000.

On 9 October 2007, following the inclusion of sale and leasebacks within the long funding lease regime, sections 228A - C CAA 2001 were amended to refer to lease and finance leasebacks and the above formulaic calculation in section 228C CAA 2001 was also amended.

If a finance leaseback terminates on or after 9 October 2007, the amount that the lessee’s profits for the accounting period in which the finance leaseback terminates should be increased by, under the current legislation, is now calculated as follows:

  • Original consideration x (Current book value/Original book value)

The original consideration is the consideration payable to the seller for granting the lessor rights over the plant or machinery

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For transactions entered into on or after 13 March 2008

From 13 March 2008 lease and leaseback transactions were also moved within the long funding lease rules so that the finance leaseback was not a short lease, see BLM62000.