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HMRC internal manual

Business Leasing Manual

Plant and machinery leasing - Anti-avoidance: Sales of lease rental streams - Capital Allowances and Rental Rebates: introduction

The tax regime for leasing of plant and machinery often acts to tax the income earned under the lease, and to relieve the capital expenditure incurred on the asset independently from each other. This distinction between the treatment of the income and expenditure historically has been open to manipulation.

The Disclosure of Tax Avoidance Schemes regime highlighted some arrangements that intended to avoid tax using methods based on this disconnect.

One particular scheme involved lessor companies generating tax losses and tax relief for their capital expenditure significantly in excess of the value of the income that was chargeable to UK tax.

A lessor company would be taxed on a very small proportion of the income from the leasing of an asset. However, that same lessor company could be in the position to claim capital allowances on the full cost of the asset, thereby creating tax losses where there was an overall commercial profit. (BLM64010)

Alternative schemes relied on obtaining a deduction for a rental rebate (as defined by section 228MC CAA 2001) to generate a tax loss where there was a commercial profit (BLM64020).