Plant and machinery leasing - Anti-avoidance: Long funding lease rules: Restriction of lessee's allowances: Transfer and long funding leaseback to obtain capital allowances
Leases commencing on or after 1 April 2006
With the introduction of the long funding lease rules in FA 2006 the right to capital allowances on an asset leased under a long funding lease now falls to the lessee rather than the lessor.
Under the new long funding lease rules it was possible for the owner of the plant and machinery to use the rules that governed the mechanism of this transfer of the availability of capital allowances, to achieve an uplift of its capital allowance entitlement in respect of plant and machinery that had appreciated in value.
Amber Ltd owns plant and machinery that is uses in its trade and which has increased in value since purchase.
Amber sells this plant and machinery, for more than its original cost, to Bank Borax plc and then leases it back under a long funding lease.
On sale of the asset Amber’s disposal value will be restricted under section 62 CAA 2001 to original cost, thus recovering capital allowances claimed up to the date of sale. Sale proceeds in excess of original cost will fall within the capital gains regime. However by entering into the long funding leaseback Amber’s qualifying expenditure upon which it can claim capital allowances will be either market value of the asset (if the leaseback is an operating lease) or an amount broadly equivalent to present value of rentals payable under the lease (if the leaseback is a finance lease). The latter figure would also be close to market value in most instances.
The benefit of being able to obtain capital allowances on the increase in value of the plant or machinery is obtained even though there has been no change in the use of the asset. Amber has essentially obtained what is commercially equivalent to a loan using the asset as security. It could even be the case that no ‘loan’ was involved, for example if Amber paid a premium for the grant of the leaseback or made payment of rentals in advance.
To deal with such situations Section 70DA CAA 2001 was introduced for leases where the commencement of the term was on or after 13 November 2008.
Leases commencing on or after 13 November 2008
Where a person (the transferor) transfers plant or machinery that is the subject of a capital allowances claim, and the transferor, or a person connected with the transferor, then enters into a long funding lease commencing on or after 13 November 2008 which makes that plant or machinery available for use by the transferor, or a person connected with them, section 70DA CAA 2001 restricts the allowances available.
The restriction is achieved by leaving out of account of the available qualifying expenditure the amount by which the capital expenditure under the lease as computed under the normal rules in section 70B or 70C CAA 2001 as appropriate exceeds ‘D’.
- If the transferor has been required to bring in a disposal value under Part 2 CAA 2001 on transfer of the plant or machinery then D is equal to that disposal value.
If the transferor has NOT been required to bring in a disposal value then D is the smaller of:
- the market value of the plant or machinery, or
- the capital expenditure incurred by the transferor, or a person connected with the transferor, on the provision of the plant or machinery before the transfer
This ensures that the capital expenditure for capital allowances purposes under the long funding lease does not include any appreciation in the value of the plant or machinery where the beneficial ownership, including any connected person, remains unchanged.
In addition the lessee, whether they are the transferor or a person connected with them, is not entitled to annual investment or first-year allowances in respect of their expenditure under the lease (section 70DA(2) CAA 2001).