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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 / Non-long funding lease interaction: Premiums and other Capital payments treated as income

As outlined at BLM62320 if a lease was granted for a capital sum, such as a premium then this capital payment was not always brought into tax, despite relief still being available though capital allowances for the full cost of the asset. FA 2008 brought in specific legislation aimed at taxing such capital payments on the same basis as the forgone rents would have been taxed, had the premium not existed.

Capital payments made on or after 13 December 2007

Sections 785B-E ICTA 1988 were brought in by FA 2008 and applied where there was a capital payment under a lease. Specifically the sections apply where, on or after 13 December 2007, there was an unconditional obligation under a plant or machinery lease to make a relevant capital payment at any time (section 785B(1)(a) ICTA 1988), or a capital payment was made under a lease otherwise than under such an obligation (section 785B(1)(b) ICTA 1988).

References to ‘payment’ also included the provision of value by any means (section 785C(10) ICTA 1988) and did not solely include the payment of money.

Capital payments included only relevant capital payments. A capital payment was relevant if at least one of two conditions (A or B) was met.

Condition A

The capital payment was payable, or paid, directly or indirectly by the lessee, to the lessor, in connection with

  • the grant, assignment, novation or termination of the lease, or
  • any provision of the lease or relevant arrangement (including the variation or waiver of any such provision).

Note - this covered both payments made by the lessee, or those by a party connected to the lessee, and also any payments received by the lessor, or by someone connected to the lessor.

Condition B

The rentals payable under the lease were less than, or payable later than, they might reasonably have been expected to be if there were no obligation to make the capital payment (and the capital payment was not made).

Capital payments made on or after 12 March 2008

For payments made on or before 11 March 2008, section 785B ICTA 1988 only applied where plant or machinery is not leased with other assets.

However for payments made on or after 12 March 2008 section 785B ICTA 1988 did apply for plant or machinery (aside from fixtures) leased with other assets.

But - section 785B ICTA 1988 only applied to the extent that:

  • it was reasonable to attribute the capital payment to that plant or machinery, and
  • if the payment were income it would not be taxable under Schedule A.

In addition, sections 785B-E IVTA 1988 did NOT apply to:

  • leases of plant or machinery where section 34A CAA 2001 prevented the expenditure on the provision of the plant and machinery from being qualifying expenditure within the meaning of Part 2 of CAA 2001,
  • contributions made by the lessee that reduced the lessor’s qualifying expenditure for capital allowance purposes,
  • indemnity payments made by the lessee to the lessor to compensate the lessor for a loss arising as a result of damage to, or damage caused by, the leased asset, or
  • payments that fell, or would fall, to be brought into account by the lessor as a disposal receipt under section 60(1) CAA. Note - This exception was removed for leases whose inception was on or after 13 November 2008.

As detailed in BLM62320, section 785C(9A) ICTA 1988 prevented double taxation of these payments by excluding the ‘initial payments’ under a long funding lease from being capital payments within section 785C ICTA 1988.

For Corporation Tax periods ending on or after 1 April 2010

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