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HMRC internal manual

Business Leasing Manual

Plant and machinery leasing - Anti-avoidance: Non-long funding lease rules: Finance leaseback - Transitional provisions - Section 228C

Accounting periods ending on or after 17 March 2004

Section 228C CAA 2001

Section 228C CAA 2001 does not apply if a finance leaseback terminates before 17 March 2004 (paragraph 4 schedule 23 FA 2004).

If after 16 March 2004 a finance leaseback terminates early (CA28930) section 228C CAA 2001 increases the lessee’s profits to recover the rest of the tax-free sum that would have been recovered by section 228B CAA 2001. If this profit increase is more than the relevant cap, the part of the profit increase that is more than the relevant cap is ignored (paragraph 5 Schedule 23 FA 2004).

The relevant cap is:

(Original consideration - relevant rentals) x net consideration

Original consideration

The original consideration is the consideration payable to the person who sold the plant and entered into the leaseback

The 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 i.e. the tax-free amount that the seller received.

The relevant rentals are the pre-commencement rentals, minus both the finance charges shown in the accounts for periods that end before 17 March 2004 and the appropriate proportion of finance charges shown in accounts for the transitional period of account.


Rob decides to unwind his leaseback. When entering into the leaseback he had sold the asset for Original consideration of £1m

As he had only paid £600,000 for it originally so on the sale he had received net consideration of £400,000.

He had paid relevant rentals of £350,000.

When the leaseback is unwound Rob’s profits are increased to recover the tax free sum of £400,000 he received on the sale of the asset up to the level of the cap. The level of the cap is:

(1,000,000 - 350,000) x 400,000 = 260,000

Rob’s profits are increased by £260,000 when the leaseback terminates.

After the introduction of sections 228A to 228J CAA 2001 transitional provisions at paragraph 6 schedule 23 FA 2004 were enacted to allow parties to a sale and finance leaseback to unwind the transaction without incurring the section 228C CAA 2001 charge provided that certain conditions are satisfied.

* The finance leaseback terminates early. 
* Within one month of the termination date the lessee becomes the owner of the asset by acquiring it from the lessor, or a person connected with the lessee. 
* No person who is not connected with the lessee has owned the asset in the period between the sale by the lessor and the acquisition by the lessee. 
* The lessor must have sold the asset at a price not less than market value. 
* The lessee’s qualifying expenditure is restricted by section 226 CAA 2001. 

Section 226 CAA 2001 restricts the buyer’s qualifying expenditure when an asset that has been the subject of a sale and finance leaseback is sold. The unwinding rules vary depending upon whether or not the section 226 restriction is more than the section 228C charge.

If the section 226 restriction is more than the section 228C(3) amount, and there is not a disposal event for 6 years from the termination date, then section 228C CAA 2001 does not apply. If the asset is disposed of within 6 years then an amount based on the disposal proceeds is brought to account.

If the section 226 restriction is not more than the section 228C charge, then the section 228C charge is reduced by the section 226 restriction with the same six-year rule applying to any subsequent disposal. The balance of the charge is held over until the asset is disposed of.

When the asset is finally disposed of this is treated as a termination of the leaseback for the purposes of section 228C CAA 2001. The section 228C(2) profit increase takes account of the final sales proceeds. The adjustment ensures that the operation of section 228C(3) CAA 2001 takes account of the ultimate disposal proceeds (or market value if higher) after excluding the restricted amount qualifying for capital allowances.

For transaction entered into on or after 9 October 2007

From 9 October 2007 the formula in section 228C CAA 2001 was amended to

Original Book Value


Original Consideration means the consideration payable to S for granting B rights over the plant or machinery,

Current Book Value means the net book value of the leased plant or machinery immediately before the termination, and

Original Book Value means the net book value of the leased plant or machinery at the beginning of the leaseback.

The formula used in the transitional provisions remains the same.