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HMRC internal manual

Business Leasing Manual

Plant and machinery leasing - Anti-avoidance: Long funding lease rules: Restriction of lessee’s allowances: Transfer and long funding leaseback to claim a revenue deduction

The long funding lease rules allow a lessee to choose whether or not to claim capital allowances. Under section 70H(1) CAA 2001 a lease is not a long funding lease in the case of the lessee, unless the lessee makes a tax return for the initial period on the basis that it is a long funding lease. This means that the lessee can choose whether to treat the lease as a long funding lease and claim capital allowances, but suffer a restriction on the allowable deduction for the rentals, or they can not treat the lease as a long funding lease and get no capital allowances but claim a deduction for the full amount of the rentals.

If the lessee under a transfer and leaseback arrangement within section 70DA CAA 2001 (BLM62110) was able to opt to treat the leaseback as a non long funding lease then if the rents were based on the appreciated market value the lessee could still obtain relief for an inappropriately high amount by claiming the full lease rental deduction.

In this case the appreciation amount was not taxed in the hands of the lessor as they treated the lease as a long funding lease and were taxed on the finance element only.

Leases commencing on or after 13 November 2008

Section 70H(1C) CAA 2001 applies for leasebacks whose term commences on or after 13 November 2008. Section 70H(1C) CAA 2001 acts to disapply section 70H(1) CAA 2001 where a person transfers plant or machinery to another person, and at any time after the transfer that plant or machinery is then available under that leaseback to be used by the transferor, or someone connected to them. The consequence of this is that the lessee under the leaseback must treat it as a long funding lease.