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HMRC internal manual

Business Leasing Manual

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HM Revenue & Customs
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Sale of lessor companies and similar arrangements: anti- avoidance: losses carried forward derived from the expense (FA06/SCH10/PARA39)

Paragraph 39 extends the period over which the benefit of the expense can be utilized incertain circumstances.

It comes into play when:

  • the expense produces a loss in the ‘new’ accounting period (AP1) that follows the change of ownership; and
  • that loss is not utilized and therefore becomes a loss that is carried forward into the ‘subsequent accounting period (AP2); and
  • AP2 starts within twelve months of the relevant day and does not start as a result of another qualifying change of ownership.

Where these conditions are met the loss created by the expense and which is carriedforward is treated as an expense of the next accounting period and so is available tosurrender as group relief.

Example 1

A Ltd draws up accounts to 31 December. The company is carrying on a business of leasingplant or machinery and there is a qualifying change of ownership on 4 December 2009 whenthe company is sold to the X Group. The relevant day is 4 December 2009.

As a consequence of the sale A Ltd is required to bring its accounting period to an end on4 December 2009 and a new accounting period starts on 5 December 2009 (AP1). The companycomputes an income and corresponding expense amount of £100m. £100m is an expense of AP1which runs from 5 December to 31 December 2009, a period of less than one month. A Ltdcomputes its profits for the period ended 31 December 2009 and finds it now has a loss of£98m.

The X Group draws up accounts to 31 December so that the corresponding accounting periodfor group relief purposes is the period to 31 December 2009. The X group has profits inthe period of only £48m and so they are insufficient to utilize the £98m loss so, butfor paragraph 39 Schedule 10 FA 2006, the remaining loss (£50m) would be carried forwardinto AP2 (year ended 31 December 2010) and . In AP 2 its use would be limited to set offagainst profits of the same trade but for paragraph 39 Schedule 10 FA 2006.

The loss is a loss of the new accounting period – AP1 – and it is not utilizedbut carried forward into the subsequent accounting period – AP2.

AP 2 starts within 12 months of the relevant day – 4 December 2009 – and A Ltdis therefore able to treat that part of the loss that derives from the expense as anexpense of the subsequent accounting period – AP2.

The whole of the loss remaining of £50m is derived from the expense and so A Ltd cancompute the profits of AP2 with a further deduction of £50m.

There are rules to ensure that only that part of the carried forward loss that isattributable to the expense is afforded this special treatment. And for this purpose theexpense is treated as the final amount to be deducted. This is illustrated in thefollowing examples.

Example 2

Say in example 1 there is already a loss of £120m in AP1 before the deduction of theexpense of £100m. The final loss of AP1 is £220m. £48m is utilized as group relief inAP1 leaving £172m to carry forward into AP2.

Not all of the £172m loss is derived from the expense. The company must compute the lossof AP1 treating the expense as the final amount to be deducted.

As the £172m exceeds the £100m expense amount only £100m is treated as an expense ofAP2.

Example 3

Say in example 1 there is a profit of £10m in AP2. The residual loss of £50m carriedforward from AP1 would normally reduce these profits to nil with the remaining £40m beingcarried forward to AP3.

The position before deduction of the SCH 10 expense in AP1 was a profit of £2m so theloss of £98m derives from the expense. The X group can utilise £48m of this loss in theperiod to 31 December 2009, leaving £50m treated as an expense of AP2. This turns theprofit of £10m to a loss of £40m which is available to utilise as a loss of thataccounting period, and so is available for group relief.

Example 4

Say in example 1 there is a further qualifying change of ownership of A Ltd on 17 March2010. AP2 will be terminated on 17 March 2010 and a new accounting period (AP3) will starton 18 March 2010 and run to 31 December 2010. AP3 is a ‘subsequent accountingperiod’ that starts within 12 months of the relevant day (5 December 2009) but itstarts as a result of a qualifying change of ownership and therefore the special treatmentof a loss carried forward into the accounting period cannot apply.