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HMRC internal manual

Business Leasing Manual

From
HM Revenue & Customs
Updated
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Sale of lessor companies and similar arrangements: change of ownership: exceptions to qualifying change of ownership: election out of charge: restrictions on availability of capital allowances

Section 398E

This guidance applies where the relevant day falls on or after 9 December 2009 and before 23 March 2011.

Following the sale of the company the acquiring group could channel assets into the lessor company so that capital allowances would reduce the ring fenced profits. To prevent this, the legislation restricts the availability of capital allowances on expenditure.

Capital allowances are not available when the expenditure creates an ‘independent asset’.

An asset is an independent asset if, in the normal course of business it can be used individually even if it could also be used as a constuent part of another asset or is used or could be used as a constituent part of a number of other assets - a combined asset.

Example 1

A ring fenced lessor company leases out trains that are constructed in units of four carriages with a driver’s cab at each end. It buys 2 new 4 carriage units. The units can be used alone but they are also used along with other such units as part of an 8 car train or a 12 car train.

The new units are independent assets because they can be used alone, they are used as part of a combined asset - the 8 car or 12 car train - and because they can be and are used as a constituent part of a number of combined assets.

Example 2

A ring fenced lessor company leases out planes. It buys 2 new aero engines. The engines can not be used alone - they need to be fitted into a plane. However, it is normal practice to exchange aircraft engines so that engines can be maintained or overhauled.

The new engines are independent assets because they can be and are used as a constituent part of a number of other assets - the various planes.

Example 3

A ring fenced lessor company leases out luxury coaches. It updates a number of its older coaches by installing air conditioning units. The units draw their power from the engine and are installed by the manufacturer into each coach.

The air conditioning units are not independent assets. They cannot be used individually and they will remain part of one combined asset - the coach.