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HMRC internal manual

Business Leasing Manual

Plant and machinery leasing - Anti-avoidance: Long funding lease / Non-long funding lease interaction: Premium paid for grant of long funding lease

As detailed in BLM61030 and BLM62320 avoidance schemes were created to provide unintended tax benefits where a business granted leases of plant or machinery for a large premium and small annual rents, and would then leaseback the asset and continue to use it.

This structure is effectively a financing arrangement, with the premium providing the funding or ‘loan’ and the rentals payable under the leaseback being the repayments. These arrangements allowed the asset user to obtain funding without having to sell the asset to do so. Having provided the funding through the premium paid, the finance provider got their interest return and their capital repaid via the leaseback rentals.

Under the long funding lease rules the premium received by the asset user on the grant of the headlease was neither taxed as income, nor brought into account as part of the capital allowances disposal proceeds. Section 502B ICTA 1988 (now Section 360 CTA 2010) set out exactly what was taxable for a long funding lessor (the interest element of the lease rentals) and this left the premium to be taxed under the capital gains regime, see BLM61030.

The finance provider could not claim capital allowances on the asset (section 34A CAA 2001 applied to prevent expenditure incurred on the provision of plant and machinery for long funding leasing from being qualifying expenditure) and were only entitled to a deduction for the interest element of the headlease rentals. If the finance provider was UK resident they were taxed on the difference between interest received under the sublease and the interest paid under the headlease, as if they had provided the funding via loan finance.

This meant the asset user obtained revenue relief for the full amount of the funding through capital allowances, but only the interest amount was brought into tax as income, creating a mismatch.

Premiums due on or after 13 December 2007

Legislation introduced initially at sections 785B-E ICTA 1988 (see below) and sections 809ZA-ZD ITA 2007 that ensured that the premium was taxed in full on receipt or, if earlier, when the obligation to pay it arose (see BLM63030).

For Corporation Tax periods ending on or after 1 April 2010

This legislation at sections 785B-E ICTA 1988 has now been rewritten to sections 890-894 CTA 2010.