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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: Rental Rebates paid on or after 9 December 2009

S60A CTA 2009 and S55B ITTOIA 2005

Whilst HMRC does not agree that the type of arrangement referred to in BLM64020 had the effect claimed, new legislation at section 60A CTA 2009 and section 55B ITTOIA 2005 was introduced to put the matter beyond doubt.

This legislation has the effect of limiting the deduction for a rental rebate paid by a lessor to the amount brought into account in computing the lessor’s income for UK tax purposes.

The new rules only apply where the lease is not a long funding lease, i.e. where the lessor is able to claim capital allowances on the cost of the asset (sections 60A(7) CTA 2009 and 55B(7) ITTOIA 2005).

Example

As in the example at BLM64015, lessor company Acheron Ltd, leases plant or machinery under a five year full payout finance lease to lessee, Lethe Ltd. As this is a full payout lease, the contract entitles Lethe Ltd to 99.9% of the amount that Acheron Ltd receives on the sale of the asset at the end of the lease as a rebate of rentals.

Prior to moving to the UK Acheron Ltd had pre-sold the rights to 95% of the income from the lease to Styx LLC, also resident overseas.

When Acheron Ltd became UK resident it then purchased the required plant or machinery for £100m and the lease to Lethe Ltd commenced.

Soon after commencement, Lethe Ltd terminated the lease and paid termination rents to Acheron Ltd of £100m. Acheron Ltd brought £5m of this rebate into account for UK tax purposes, having paid the remaining £95m over to Styx LLC.

Acheron Ltd then sold the asset for its market value, £100m. They bring this amount as their disposal value for capital allowances purposes. Following the sale Acheron Ltd paid 99.9% of the sale proceeds, or £99,900,000, to Lethe Ltd as a rental rebate.

Section 60A CTA 2009 now acts to limit the deduction given to Acheron Ltd for the rental rebate to £5m, as this is the amount received under the lease which has been brought into account in computing Acheron Ltd’s profits chargeable to corporation tax.

Sections 60A CTA 2009 and 55B ITTOIA 2005 have effect for rebates of rental which become payable on or after 9 December 2009.

Interaction with TCGA 1992

The disallowed element of the rental rebate (£94.9m in our example) is a loss for chargeable gains purposes. However this is further limited

  • firstly - to the amount, if any, by which the rental rebate exceeds the amount of capital expenditure incurred by the lessor: and
  • secondly - the loss treated as accruing to the lessor is ring-fenced and is only available to be offset against a chargeable gain on the disposal of the same asset (sections 60A(6) and 55B(6)).