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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: Finance leaseback - Leaseback not a finance lease for lessee

Finance leaseback arrangements may occur where the lessee treats the leaseback as an operating lease but the lessor treats it as a finance lease.

Accounting periods ending on or after 17 March 2004

Since the lessee had not accounted for the leaseback as a finance lease, it was not possible to calculate the permitted maximum for the deduction of lease rentals, or the amount by which the lessee’s profits were increased where a leaseback terminated early. Consequently the legislation in section 228C and section 228D CAA 2001 could not apply.

Section 228G CAA 2001 applied in this situation, but only if the lessor accounted for the lease as either a finance lease or loan.

Where the leaseback was accounted for as a finance lease in the accounts of a person connected with the lessee

Where section 228G(3) CAA 2001 applied as the leaseback was not accounted for as a finance lease in the lessee’s accounts, but it was accounted for as a finance lease in the accounts of a person connected with the lessee section 228G(2) CAA 2001 was then applied. In this case the amount as ascertained by reference to the connected person’s accounts was used for the purposes of the “relevant calculation”, the latter being the permitted maximum for the purposes of section 228B CAA 2001 (see BLM61040) or the increase required by section 228C CAA 2001 (see BLM61045).

Where the leaseback was not accounted for as a finance lease in the accounts of a person connected with the lessee

If the leaseback was not accounted for as a finance lease in the lessee’s accounts, or in the accounts of a person connected with the lessee, and the term of the leaseback commenced on or after 18 May 2004 the rules at section 228G(5) and (6) CAA 2001 applied as follows:

The lessee’s profits for the period of account in which the leaseback began are increased by these amounts:

* Where there is a sale and finance leaseback - net consideration. (Net consideration is 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. That is, it is the tax-free amount that the seller received.) 
* Where there is a lease and finance leaseback - the consideration that the original owner received for granting the lease to the finance lessor.

Transactions entered into on or after 9 October 2007

Note - Consequential amendments were made to section 228G CAA 2001 to reflect the changes made to sections 228B and 228C CAA 2001, as detailed earlier in this chapter at BLM61045 effective for transactions entered into on or after 9 October 2007.