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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 - Transitional provisions - Section 228B

Accounting periods ending on or after 17 March 2004

Section 228B CAA 2001

Where there is a sale and finance leaseback, section 228B CAA 2001 restricts to the ‘permitted maximum’ the lease rentals that the lessee may deduct in computing their income or profits.

The deduction for lease rentals is restricted to the permitted maximum. The permitted maximum for an accounting period is the total of:

* the finance charge shown in the accounts, 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.

This restriction was intended to recover any tax free sum that the lessee may have received on the sale of the asset because of the restriction of their disposal value under section 222 CAA 2001.

This leaves the lessee with ‘excess rentals’. The lessee’s excess rentals are those rentals that would have been deducted for the period before the introduction of the legislation, minus the actual rental deductions that have been allowed. The transitional provisions at paragraphs 2 and 3 of schedule 23 FA 2004 allow a deduction for the excess rentals.

Example

Rob pays rent of £100,000 for his accounting period ended 24 May 2004. The rental deductions he is allowed for that period are £60,000.

Rob’s excess rentals are £40,000 (£100,000 - £60,000)

If the lessee has excess rentals (CA28920) Section 228B CAA 2001 is amended for the transitional period of account and later periods to allow them. The rules end when the lessee’s excess rentals have been allowed in full.

For the transitional period of account and later periods the permitted maximum (CA28920) for an accounting period is increased. The increased permitted maximum is the excess rentals that have not yet been relieved plus a fraction of the usual permitted maximum for that period.

The fraction is:

Notionalrentaldeduction-deductibleexcess
 
Notional rental deduction

The notional rental deduction is the deduction that would have been allowed if section 228B CAA 2001 had not applied (£100,000).

The deductible excess is the excess rentals or the unrelieved portion of the excess rentals (£40,000).

In the transitional period of account the permitted maximum is the higher of the increased permitted maximum, given by the above calculation, and the appropriate fraction of the notional rental for that period.

If a termination occurs in the transitional period of account the permitted maximum is not affected by the transitional provisions outlined above.

If the lease terminates before all of the unrelieved portion of the excess rentals can be used then you should increase the permitted maximum for the accounting period in which the lease terminates by the amount of the excess rentals that cannot be used.

Example (continued)

Rob’s increase in his permitted amount for the period is therefore

100,000 - 40,000 = 0.36
   
100,000  

The increase in Rob’s permitted maximum is 0.36 x £60.000, or £21,000. This is the amount of his excess rentals that Rob can deduct in year 1. In year 2 he will repeat the calculation with the unrelieved portion of the rentals (£19,000)

100,000 - 19,000 = 0.81
   
100,000  

For year 2 the increase in Rob’s permitted maximum is 0.81 x £60.000, or £48,600. This is more than the balance of Rob’s excess rentals so he can only deduct the £19,000 of excess rentals remaining and will not have to use the transitional provisions the following year.