Plant and machinery leasing - Anti-avoidance: long funding lease / Non-long funding lease interaction: Film leasing
S376 CTA 2010
As a result of HMRC encountering aggressive avoidance arrangements involving businesses leasing films to others, via long funding leases, FA 2009 introduced section 502GD ICTA 1988 to ensure the rents under such leases were taxed in full. The interpretation and transitional provision for section 502GD can be found at Schedule 33, FA 2009. For accounting periods ending on or after 1 April 2010 section 502GD was rewritten to section 376 CTA 2010.
Leases incepted before 13 November 2008
The film rules which operated before 1 January 2007 provided special relief for the cost to businesses of producing or acquiring a film. The reliefs were typically claimed by partnerships of wealthy individuals who leased the films to companies which were in a position to commercially exploit them. The reliefs required the leased income to be taxable in full, but the partners enjoyed a deferral of their tax liabilities (for up to 15 years).
Arrangements were encountered where the taxable rental income was being transformed into a mainly non taxable income stream by replacing existing leases with long funding leases of plant and machinery. As a long funding lease the rental earnings of the lessor were restricted to the finance charge element under section 502B ICTA 1988, or later section 360 CTA 2010, and this led to the partnerships replacing taxable income stream with one that would be largely untaxed. Section 502GD ICTA 1988 was enacted to counter this. It should be noted that it is targeted at avoidance and does not aim to affect the current film tax relief scheme at Part 15 CTA 2009 which applies to films that commence principal photography on or after 1 January 2007.
It is important to note that because the change in the film relief legislation is linked to the date that production commences there may still be occurrences of leasing arrangements where the old film rules will apply.
Leases incepted on or after 13 November 2008
The legislation, whilst aimed mostly at partners, will apply to other persons entering into long funding leases of films. It applies where the inception of the long funding lease is on or after 13 November 2008.
The legislation works by preventing the usual provisions at sections 360-369 CTA 2010 (sections 502B to 502G ICTA 1988) which limit the lessor’s taxable income under the long funding lease provision, from applying. It therefore taxes the lease as if it was not a long funding lease, i.e. not solely on the finance element but also on most of the capital element within the rental receipt.
The provision introduced at section 502GD ICTA 1988 applies to the treatment of the lessor’s taxable income. It does not disapply the long funding lease rules for the person who is entitled to claim capital allowances as this relief is not the entitlement of the lessor.
Assume a partnership has an accounting year end of 31 December. It receives rent of:
- £15,000 on 1 November 2008 for the year ended 31 October 2009 of which £4,000 represents finance charges and £11,000 represents the capital element.
- £15,000 on 1 November 2009 for the year ended 31 October 2010 of which £3,000 represents finance charges and £12,000 represents the capital element,
The finance charge elements for both the 2008 and 2009 years will be taken into account for the calculation of taxable income. This treatment is the case both before and after the introduction of section 502GD ICTA 1988. As noted above the section focuses on the capital element within the long funding lease.
The legislation at section 502GD will apply to the 31 December 2008 period. However, the £11,000 will not be adjusted for and will not come within the charge to tax. This is due to it being paid on 1 November 2008 and due before the relevant date, 13 November 2008 (paragraph 6, Sch 33, FA 09).
Section 502GD ICTA 1988 will also apply to the 31 December 2009 period. The £12,000 capital element of rent paid will be taxed and included in the calculation of the partnerships income.
However, as the £12,000 payment straddles the periods of account it is apportioned accordingly, i.e. £2,000 (Nov to Dec 2008) falls within the 31 December 2009 period of account and £10,000 (Jan to Oct 2009) falls within the 31 December 2010 period of account.
Accounting periods ending on or after 1 April 2010
The legislation at sections 502B-G ICTA 1988 has now been rewritten to sections 360-369 CTA 2010 and the legislation at sections 502GA-GD ICTA 1988 has now been rewritten to sections 370-376 CTA 2010.