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HMRC internal manual

Business Leasing Manual

HM Revenue & Customs
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Plant and machinery leasing - Anti-avoidance: Sales of lease rental streams - Capital Allowances and Rental Rebates: Claim to Capital Allowances on or after 9 December 2009

S228MA-MC CAA 2001

HMRC does not necessarily agree that the type of arrangement in BLM64010 worked as described. However, to put the matter beyond doubt, legislation was introduced from 9 December 2009.

The legislation was introduced by FA 2010 and acted to restrict the amount of capital allowances available. Sections 228MA to 228MC CAA 2001 were introduced and are effective in relation to expenditure incurred on or after 9 December 2009.

Section 228MA CAA 2001 applies where capital expenditure is incurred by a lessor on the provision of leased plant and machinery, and arrangements are in place at that time, such that the lessor’s economic value in the lease has been reduced.

The lessor’s qualifying expenditure on the asset is restricted to the value of the asset to the lessor which is defined at sections 228MA(2) and (3) CAA 2001 as:

V = VI + VR.

VI is the present value of the amounts reasonably expected to be brought into account as income in connection with the lease. This includes rents and amounts treated as income under S785B ICTA 1988 or S890 CTA 2010 but excludes capital allowances disposal receipts.

VR is included to cover circumstances where the lease is not a full payout finance lease e.g. an operating lease. This amount is the present value of the residual value at the end of the lease, less any amount of rental rebate, as defined by S228MC CAA 2001.

Section 228MB CAA 2001 sets out the basis for these present value calculations.


Lessor company Acheron Ltd, which is resident overseas, enters into a contract for a five year full payout finance lease with UK resident lessee, Lethe Ltd. As this is a full payout lease, the contract entitles Lethe Ltd to 99.9% of the amount that Acheron receives on the sale of the asset at the end of the lease as a rebate of rentals.

When they have entered into this contract, Acheron Ltd then sells the rights to 95% of the income from the lease to Styx LLC, also resident overseas.

Having done this Acheron Ltd moves its place of effective management to the UK and becomes UK resident for tax purposes. When it is UK resident, Acheron Ltd, purchases the required plant or machinery for £100m and the lease to Lethe Ltd commences.

The present value of Acheron Ltd’s income taxable in the UK is £5m (VI).

If the present value of the plant or machinery’s residual value at the end of the lease term is £80m, and 99.9% of it is due be paid to the lessee as rebate of rentals (as it is a full payout lease), then VR of £80,000 (net present value of residual amount £80m less amount of rental rebate of £79.92m) is taken into account when determining the qualifying expenditure

V = VI (£5m) + VR (£0.08m) = £5.08m

Where capital expenditure is incurred in instalments, the legislation operates in a cumulative manner (section 228MA(5) CAA 2001). For example, if V is £15m, but the £100m capital expenditure is incurred in ten instalments of £10m, then the lessor’s qualifying expenditure is the full £10m on the first instalment. The qualifying expenditure on the second instalment is limited to £5m, and no further amount of qualifying expenditure is brought in on any of the remaining instalments.