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HMRC internal manual

Business Leasing Manual

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HM Revenue & Customs
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Plant and machinery leasing - Anti-avoidance: Non-long funding lease rules: Computation of lessor's profits where lessee restriction to lease rental deduction has applied

Note - Section 228D CAA 2001 was repealed for transactions entered into on or after 9 October 2007.

Accounting periods ending on or after 17 March 2004

For accounting periods ending after 16 March 2004 in the case of either sale and finance leaseback or lease and finance leaseback, section 228D CAA 2001 acted to recompute the lessor’s profits.

In a sale and finance leaseback for the purposes of capital allowances the lessor’s qualifying expenditure was limited by section 224 CAA 2001 to the restricted disposal value of the seller, determined in accordance with section 222 CAA 2001. As this may have been less than the price that the lessor actually paid, where appropriate an adjustment was made to the corresponding income received under that lease.

To take account of the lessor’s restricted qualifying expenditure, the permitted profit threshold was calculated, and the amounts received under the sale and finance leaseback that were above the permitted threshold were left out of account, section 228D(3) CAA 2001.

For example, if the permitted threshold is £8,000 and the lessor receives rents of £10,000 then £2,000 of the £10,000 is not taxed

The permitted threshold was (a) the gross earnings, plus (b) the allowable proportion of the capital expenditure as defined in section 228D(4) CAA 2001.

* The gross earnings were the amount shown in the lessor’s accounts as the gross earnings under the leaseback, section 228D(5) CAA 2001.
* The allowable proportion of the capital repayment was the expenditure qualifying for capital allowances spread over the length of the lease, given by the formula in section 228D(6) CAA 2001:

Restricted disposal value x (investment reduction for period/Net Investment

* Investment reduction for period was the amount shown in the lessor’s accounts in respect of the reduction of net investment in the leaseback
* Net investment was the amount shown in the lessor’s accounts as the lessor’s net investment in the leaseback at the beginning of its term.

In a lease and finance leaseback there is no capital repayment and so the permitted threshold was the gross earnings in the lessor’s accounts.

Assignments made before 17 March 2004

If the lessee is a lessee by way of an assignment made before 17 March 2004 these rules do not apply and the lessor is taxable on the gross rents received.

Transactions entered into on or after 9 October 2007

Section 228D CAA 2001 was repealed for transactions entered into on or after 9 October 2007.