CA23195C - Plant and Machinery Allowance (PMA): First-Year Allowance (FYA): 40% First-Year Allowance: Plant or machinery for leasing – practical guidance

Sections 45U and 46 CAA01

Overseas leasing

A lessor can only claim the 40% FYA if the plant or machinery is not for “overseas leasing”. 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 (see CA23195B for detailed guidance).

A lessor claiming the 40% FYA should carry out checks to ensure plant or machinery is not used for overseas leasing, keep records of the checks carried out and provide evidence to HMRC when requested.

You can normally accept a contractual provision prohibiting the use of the plant or machinery for non-qualifying purposes, or confirmation from the lessee that it will not be used in a non-qualifying way, is sufficient unless you have a reason to suspect the plant or machinery is being used in a non-qualifying way.

The following factors may also be relevant when considering the use of the plant or machinery:

  • Information provided by the lessee in the course of leasing the asset such as delivery location and trading address
  • A lessee’s company registration number or VAT registration number
  • Publicly available information about the lessee such as a company website or company accounts
  • Tracking information in cases where an asset is fitted with a location tracker

This is not an exhaustive list and there may be other factors that are relevant in considering whether the asset is leased overseas or not. The factors listed may not be relevant in every case. For example, you should not deny a claim where tracking information is not provided if a location tracker has not been fitted to an asset.

Sub-leasing, sub-hiring and cross-hire

Where there are any sub-lessees, all sub-lessees must also use the plant or machinery in a qualifying way.

Sometimes plant or machinery is hired to other leasing or hiring businesses for onward leasing or hiring to other customers to help fulfil their customers’ demands. This practice, known as cross-hire or re-hire, does not prohibit expenditure from qualifying for the 40% FYA. The same principles apply to cross-hire as to any other sub-lease.

There is a risk that plant or machinery could be sub-leased and one of the sub-lessees could be outside the UK and using the plant or machinery for earning income which is outside the charge to UK tax. You should expect a lessor claiming the 40% FYA to carry out checks to ensure this is not the case.

If the lease contract includes a prohibition on the plant or machinery being sub-leased, you can normally accept that it has not been sub-leased unless you have a reason to suspect this is not the case. If the lease contract includes a prohibition on the plant or machinery being sub-leased unless prior written consent is granted by the lessor, you should expect the taxpayer to be able to provide you with details of any consents that have been granted. Where no such consents have been granted, you can normally accept that it has not been sub-leased unless you have a reason to suspect this is not the case.

Leasing businesses should check to ensure conditions of this nature are being complied with. Leasing businesses should also keep records of the checks they have carried out and share these with HMRC when requested.

If there is no contractual prohibition on sub-leasing, the arrangements are at higher risk of being used for overseas leasing. You should expect leasing businesses to be able to provide details of the lessees and any sub-lessees and details about the use of the asset by those lessees and sub-lessees. Where such information is not provided, you should refuse the claim to the 40% FYA.

Insignificant use

You can accept a claim to the 40% FYA if the amount of use for overseas leasing is insignificant. For example, an asset leased to a French company for earning income subject to French tax for a period of two weeks but to a UK company for the rest of the year, will be insignificant and you can accept a claim to the 40% FYA on such expenditure.

Whether use for overseas leasing is insignificant or not will depend entirely on the specific facts of the case being considered. For example, you might be satisfied that the use for non-qualifying purposes is insignificant where both of the following apply:

  • The plant or machinery is leased for non-qualifying purposes for less than 5% of the total time the asset was available for leasing in a chargeable period; and
  • The rental income makes up less than 5% of the total rental income received for the plant or machinery in a chargeable period.

However, the 5% is illustrative only and not definitive. For example, just because the total time is insignificant, the overseas rental income might not be. Consider all the facts and discuss with the capital allowances team in BAI if in doubt.

Plant or machinery taken outside the UK

Simply taking the leased plant or machinery outside the UK does not on its own mean that the expenditure does not qualify for the new FYA.

For example, if a heavy goods vehicle is leased to a UK logistics business using it for earning income within the charge to UK tax, it does not matter for these purposes if the heavy goods vehicle is driven outside the UK. If the heavy goods vehicle was used by a non-UK logistics business for the purposes of earning income subject to tax outside the UK, then the expenditure would not qualify.

Equally if a UK van hire business, for example, hired a van to a UK-resident individual for moving personal belongings from the UK to a relative’s home in France, the expenditure will qualify for the 40% FYA because it is not being used to earn income from a source outside the UK.