CA23195B - Plant and Machinery Allowance (PMA): First-Year Allowance (FYA): 40% First-Year Allowance: Plant or machinery for leasing

Sections 45U and 46 CAA01

Expenditure on the provision of plant or machinery for leasing is excluded from all other FYAs (“the leasing exclusion” – see CA23113). However, the leasing exclusion is disapplied for the purposes of the 40% FYA, thus expenditure on the provision of plant or machinery for leasing is eligible for the 40% FYA, where either:

  • The plant or machinery is provided for leasing to a lessee (and all sub-lessees) for use by the lessee (and all sub-lessees) wholly, or almost wholly, for the purpose of earning income which is within the charge to tax, or
  • The plant or machinery is provided for leasing to a lessee (and all sub-lessees) who is resident in the United Kingdom where the circumstances are such that the plant or machinery is not for use (to a significant extent) by the lessee (and all sub-lessees) for the purpose of earning income which is from a source outside the United Kingdom and which is outside the charge to tax.

Broadly this means that plant or machinery for leasing to a person for use within the UK will qualify for the 40% FYA. The first case covers leases of plant or machinery to businesses for use for earning income within the charge to UK tax. The second case covers leases to UK-resident persons provided the plant or machinery is not used for earning income outside the UK that is not subject to UK tax.

In this context, the letting of a ship on charter, or of any other asset on hire, is to be regarded as leasing (whether or not it would otherwise be so regarded). Consequently, references in this guidance to leasing should be read as also referring to hiring as well as the letting of a ship on charter.

For these purposes, income is to be regarded as being outside the charge to tax if the income arises to a person who is afforded or entitled to claim any relief from the tax chargeable on the income under:

  • Double taxation arrangements, or
  • Unilateral relief arrangements.

The lessor should also assume that a lessee (and all sub-lessees) has made every claim or election for relief from tax or exemption from tax which the lessee (and all sub-lessees) is entitled to make, unless the contrary can be shown.

For example, if plant or machinery is for leasing to a UK-resident company for use by a foreign permanent establishment, the income attributable to which would be outside the charge to tax if an election was made under Section 18A Corporation Tax Act 2009, the lessor must assume that such an election has been made, thus the income is outside the charge to tax, unless the contrary can be demonstrated.

The effect of these provisions considered together is that expenditure on the provision of plant or machinery for leasing would qualify for the 40% FYA if all the other conditions are met, for example, in the following circumstances:

  • The plant or machinery is for leasing to a UK business (either unincorporated or incorporated) for use by the lessee for earning income within the charge to UK Corporation Tax or UK Income Tax.
  • The plant or machinery is for leasing to a UK-resident (such as an individual, company, charity or public body) provided the lessee doesn’t use the plant or machinery for earning income outside the UK which is outside the charge to UK tax.

In both cases, where there are any sub-lessees, all sub-lessees must also use the plant or machinery in a way which meets one of the two cases.

In contrast, expenditure on the provision of plant or machinery for leasing or sub-leasing to a non-UK resident for the purposes of earning income not subject to UK tax does not qualify for the 40% FYA.

The term “overseas leasing” is used in this guidance on the 40% FYA as a shorthand for the types of leasing which do not qualify.

There is practical guidance on how to apply these provisions at CA23195C and there are examples at CA23195D.