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HMRC internal manual

Business Leasing Manual

Plant and machinery leasing - Anti-avoidance: Non-long funding lease rules: Sale / Lease and leaseback arrangements post 9 October 2007

Accounting periods ending on or after 17 March 2004

Schemes were entered into to exploit the legislation at sections 228B to 228D CAA 2001 by arranging for the lessee to be non-taxpaying in the UK. The intention of these schemes was to leave the UK lessor only taxed on a limited amount of the lease rental income received, but entitled to capital allowances on the full value of the leased equipment.

New legislation was introduced with effect from 9 October 2007 and 12 March 2008.

Sale and finance leaseback arrangements: entered into on or after 9 October 2007

For plant or machinery subject to sale and finance leaseback arrangements entered into on or after 9 October 2007 the finance leaseback is now prevented from being a short lease by section 70I(10) CAA 2001. This means that a finance leaseback (other than an excluded lease) is a long funding lease as defined in section 70G CAA 2001, because it is not a short lease and is a funding lease (section 70J(1)(a) CAA 2001), irrespective of the length of the leaseback. This leaves the capital allowance entitlement with the seller or someone connected to the seller.

Where, following the sale there is more than one finance lease which results in, directly or indirectly, the plant or machinery continuing to be used for the purposes of the activity carried on by the seller or by a person (other than the buyer) who is connected with the seller. Then each such finance lease will not be a short lease and consequently, unless an excluded lease, will be a long funding lease.

The only exception to this is where the finance leaseback is a lease of new equipment, or equipment acquired and brought into use by the seller not more than four months before it is leased back. In those circumstances it is possible for the lessor and lessee to make a joint election under section 227 CAA 2001 if the conditions at section 227(2) CAA 2001 are met (CA28650).

With effect from 9 October 2007 much of the leasing anti-avoidance legislation in Chapter 17 CAA 2001 was repealed. For sale and finance leaseback arrangements entered into after that date the section 222 restriction does not apply, and therefore the section 228B claw back mechanism will have no effect, although it is still in point for lease and finance leasebacks.

The legislation at section 224 CAA 2001 restricting the amount on which the lessor was taxed was repealed at the same time, as was the legislation at sections 228D and 228E CAA 2001.

Lease and finance leaseback arrangements: entered into on or after 12 March 2008

For lease and finance leaseback arrangements entered into on or after 12 March 2008 the leaseback was also brought within the long funding lease rules by excluding such leases from the short lease exemption (section 70I(9A) CAA 2001).

For the lessee a lease is not a long funding lease unless they make a return on this basis (BLM20105). Section 70H(1) CAA 2001 allows the lessee to choose whether the long funding rules should apply. The lessee under the leaseback can still choose to treat the lease as a non long funding lease. If they do so then neither party to the lease will obtain capital allowances. However, in this case both will be taxed appropriately; the lessor will be taxed on their ‘interest turn’ and the lessee will obtain deductions for all the lease rentals paid.