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HMRC internal manual

Business Leasing Manual

Plant and machinery leasing - Anti-avoidance: Non-long funding lease rules: Finance leaseback - subject to further operating lease

Sometimes a person who is leasing plant or machinery under a sale and finance leaseback (or a lease and finance leaseback) will then lease it out again under an operating lease.

Accounting periods ending on or after 17 March 2004

If plant or machinery subject to a sale or lease, and finance leaseback is then leased out again under an operating lease (the sublease) and the following conditions are satisfied, section 228J CAA 2001 acts to limit the deductions of the lessee in respect of the sublease.

It will also act to limit the amounts receivable under the sublease that fall to be taken into account in respect of the sublease when calculating the income or profits of the lessor of the sublease.

Section 228J CAA 2001 applies when the following conditions are met with regard to the sublease:

* the term of the lease begins on or after 18 May 2004, 
* the lessee, or a person connected with the lessee, is the person who entered into the sale and finance leaseback or the lease and finance leaseback, 
* the lessee accounts for the sublease as an operating lease.

If those conditions are met then the following rules apply:

* The amount that the lessee can deduct in computing profits for the payments made under the sublease is restricted. It cannot be more than the relevant amount (which is equal to the permitted maximum under section 228B CAA 2001) for the lessor’s deduction for lease rentals under the leaseback. 
* If the lessor is due to make a payment to the lessee under the operating lease ignore that payment when you calculate the lessor’s income. Take the full amount of the lease rentals into account. 
* When you calculate the lessor’s income or profits ignore income from the lease to the extent that it is more than the relevant amount. 
* If only some of the plant or machinery is leased under the operating lease make a just and reasonable apportionment before you apply the above rules. 


Anthony carries on a trade in the UK. He sells equipment to Banco Menas, a bank resident in Spain, for £490,000, its then market value, and finance leases it back. The market value of the equipment at the time of the sale and finance leaseback is £490,000 and the notional written down value is £55,000. So Anthony’s disposal value is £55,000. Anthony’s permitted maximum for an accounting period is the finance charge shown in his accounts plus the depreciation that would have been charged if the equipment had cost £55,000.

Once Anthony has leased the equipment back he leases it to Cleopatra (with whom he is connected) on an operating lease for an annual rent of £50,000. Suppose Anthony’s permitted maximum for his lease rentals to Banco Menas is £8,000 a year. This means:

Cleopatra can only deduct rent of £8,000 a year in computing her profits because her relevant amount is equal to the £8,000 that is Anthony’s permitted maximum for his lease rentals to Banco Menas.

If Anthony is due to give Cleopatra a rebate of £3,000 Anthony’s rental income is £50,000 not £47,000.

Anthony’s rental income is restricted to £8,000. The excess over £8,000 is ignored because £8,000 is the permitted maximum.

Transactions entered into on or after 9 October 2007

Note - Consequential amendments were made to section 228J CAA 2001, effective for transactions entered into on or after 9 October 2007.