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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: Long funding lease rules: Disposal values: Lessor disposal value reduced by premium paid for the grant of the lease

Leases premiums paid on or after 1 April 2006

Where a lease was granted for a premium the net investment in the lease that was shown in the lessor’s accounts, in accordance with GAAP, on the date the lease was first recognised would not reflect that premium paid. It would only reflect the lease rentals outstanding.

This was because accounts are traditionally drawn up at the end of the business day, and at the end of the day the premium would already have been received and was therefore no longer due and part of the net investment in the lease.

This in turn reduced the lessor’s disposal value for capital allowance purposes, which was calculated with reference to the lessor’s net investment in the lease under section 61(2)(5A) CAA 2001. The premium was also claimed to be a capital sum, rather than a revenue receipt, which would therefore not be taxable as the lessor’s income from the lease.

Similar arrangements reducing the disposal value on the grant of a long funding lease were seen using ‘advance payments’ rather than premiums. An example is at BLM62230.

On 13 December 2007 rules were introduced to counter such avoidance involving premiums.

Lease premiums paid on or after 13 December 2007

Sections 785B and S785C ICTA 1988 were enacted by FA 2008 to treat relevant capital payments, such a premium paid on the granting of a lease, as income of the lessor.

Where the premium is payable under an unconditional obligation it will be taxable in the period in which that obligation arises, otherwise it will be taxable in the period received.

The exceptions to this are:

* For payments made on or before 11 March 2008 the new rules will only have effect for payments made in respect of leases of plant and machinery that are not leased with other assets (Paragraph 1(3) of Schedule 20 FA 2008)
* For payments made on or after 12 March 2008, the rules will also have effect for plant and machinery (other than fixtures) leased with other assets, but only to the extent that:

* It is reasonable to attribute the capital payment to the plant and machinery, and
* If the payment were income, it would not be taxed as property income under Schedule A.

Lease premiums paid on or after 13 November 2008

The disposal value to be brought in by the lessor on the commencement of the term of a long funding finance lease, given by item 5A of column 2 of the Table at section 61(2) CAA 2001, was amended for disposal events on or after 13 November 2008.

Following this amendment the disposal value was calculated with reference to the qualifying lease payments, which included any initial payments made under the lease.

As a result, the lessor’s disposal value will include amounts falling with the definition of ‘initial payments’ (defined at section 70YI CAA 2001) i.e. lease premiums.

The change made means that the disposal value to be brought in is either the qualifying lease payments, being the minimum payments under the lease including any initial amount, or the market value of the plant or machinery at commencement of the lease, whichever is the greater.

See BLM61030 and BLM63020 for further details on lease premium avoidance.

Accounting periods ending on or after 1 April 2010 and tax years 2010-11 onwards

For accounting periods ending on or after 1 April 2010, and for tax year 2010-11 and subsequent tax years the legislation at sections 785B and 785C ICTA 1988 was rewritten to sections 890-894 CTA 2010.