Beta This part of GOV.UK is being rebuilt – find out what this means

HMRC internal manual

Business Leasing Manual

From
HM Revenue & Customs
Updated
, see all updates

Calculating the income amount: Adjustments to the balance sheet figures - transfer to the lessor company from a connected party

CTA2010/S401

Where assets have been transferred to the lessor company from a connected party at any time prior to the relevant day the balance sheet amount should be adjusted to reflect the market value of the asset unencumbered by the lease if the relevant day falls before 23 March 2011 or the ascribed value if the relevant day falls on or after 23 March 2011. This adjustment is only made when the relevant day falls after 22 March 2006.

The reason for this is that the asset may have been acquired at tax written down value. By bringing the market value, or the ascribed value of the asset into the calculation of PM the PM - TWDV formula captures, and recovers, the difference.

Example

A lessor company, B Ltd buys a ship for £10m. The ship is subject to an operating lease.

On 9 September 2009 the ship is transferred to another group company, A Ltd. The ship stands in the accounts of B Ltd at £6m and its tax written down value is £2m.

The transfer takes place for £3m, generating a loss in the accounts of B Ltd.

The transfer is within section 343 ICTA 1988 so that for tax purposes the ship is treated as being transferred to A Ltd at its tax written down value which is £2m.

In the accounts of the companies the ship is treated as transferred at £3m.

A Ltd is sold on 30 September 2009 and the PM value in the accounts is £3m.

If B Ltd had been sold on 9 September an income amount would have been calculated using the carrying amount (£6m) and the written down value (£2m) to give a charge of £4m. By transferring the ship at £3m and selling A Ltd, the income amount is calculated using the carrying amount (£3m) and the written down value (£2m) to give a charge of £1m. The charge has been artificially suppressed.

To prevent this section 401 (5) substitutes the market value of the ship.

If the company had been sold on or after 23 March 2011 the ascribed value would be substituted rather than the market value.

Market value is determined as if the ship were unencumbered by a lease. In this case it is agreed that the ship is worth £6m and resulting charge is appropriate.

Ascribed value is determined by reference to the higher of the market value of the asset or the present value of the lease. See BLM80147.