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HMRC internal manual

Capital Allowances Manual

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HM Revenue & Customs
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PMA: Long funding lease: transitional issues

FA06/SCH8 Part 4

Excepted lease

Normally the long funding lease legislation applies to leases finalised on or after 1 April 2006 or where the commencement of the term of a lease is on or after 1 April 2006 CA23805. There is an exception to this.

The long funding lease legislation does not apply to a lease finalised on or after 1 April 2006 if the lease is an excepted lease.

These are the conditions that have to be satisfied for a lease to be an excepted lease.

  1. There was an agreement or a common understanding between the lessor’s side and the lessee’s side as to the principal terms of the lease before 21 July 2005. The lessor’s side is the lessor or anyone who controls the lessor, either alone or with someone else. The lessee’s side is the lessee and anyone who controls the lessee, either alone or with someone else.
  2. The leased asset was under construction on before 1 April 2006. An asset is under construction at any time between the time when construction begins and the time when construction ends. There is one exception to this. Do not treat a leased asset as under construction after the commencement of the term of the lease. If it is known from the start that an asset consists of two or more component parts treat the asset as under construction after the construction of any of those parts begins.
  3. The lease is finalised before 1 April 2007.
  4. The commencement of the term of the lease is before 1 April 2007.
  5. The lessee is the person that the pre-existing heads of agreement identify as the lessee.
  6. The principal terms of the lease are not materially different from those in the pre-existing heads of agreement or would not be if it were not for CAA01/S70M CA23835. Section 70M applies where there is a derived lease of plant and machinery and determines its term and the rents treated as payable under it.

 

Some assets, such as ships, take a long time to construct and so even if construction began before 1 April 2006 it might not be possible for conditions 4 and 5 to be satisfied. The time limits in conditions 4 and 5 are extended to 1 April 2009 when the following conditions are met.

  1. The commencement of the term of the lease is before 1 April 2009.
  2. The commencement of the term of the lease is as soon as is reasonable practicable after construction of the asset is substantially complete.
  3. Construction of the asset proceeded continuously from 1 April 2006 onwards. This means that there cannot have been a break in the construction process.
  4. Construction of the asset was done at the normal rate for assets of that type. Normal rate is the rate at which the asset would be constructed in reasonable time without breaks or interruptions in accordance with normal business practice.

 

Events beyond the control of the people involved may make it impossible to meet conditions (b), (c) or (d). You should treat an event as being beyond the control of a person if the person could not foresee the event and could not have reasonably foreseen the event when the main contract for construction was entered into. For example, the ship carrying materials to be used in the construction of the asset may sink.

Pre-existing heads of agreement relating to two or more assets

You may have a case where the pre-existing heads of agreement relates to more than one asset.

If an asset is for use individually, that is if it can be used on its own separately from any other assets, treat the asset as if it had its own pre-existing heads of agreement and, once there is a finalised lease, its own separate finalised lease.

Where assets are constituent parts of a combined asset treat the combined asset as a single asset and the constituent parts as component parts of it. You then treat the combined asset as a single asset with its own pre-existing heads of agreement and, once there is a finalised lease, its own separate finalised lease.

Use the rules on CAA01/S70L and S70M CA23835 to work out the terms of the deemed separate pre-existing heads of agreement and, once there is a finalised lease, the separate finalised lease.

Expenditure incurred before FA2006 is passed

A lessor may incur expenditure on the provision of an asset for leasing under a long funding lease before FA06 is passed.

If the lease is not an excepted lease and there was a pre-existing heads of agreement for that long funding lease before 21 July 2005 split the expenditure into two parts. The first part is expenditure incurred before 19 July 2006, the date on which FA06 was passed, and the other part expenditure incurred on or after that date. Treat the two parts as if they had been incurred on separate assets for leasing under a long funding lease. You should split the rents into two parts on a just and reasonable basis.

Treat the part relating to expenditure incurred before 19 July 2006 as if its long funding lease were an excepted lease. That means that the long funding lease legislation does not apply to it.

Treat the other part as if it had been incurred on an asset for leasing under a long funding lease to which the long funding lease legislation applies.

The normal rules about when expenditure is incurred CA11800 apply with this addition. It is another anti-avoidance provision. The terms of an agreement may be varied so that an obligation to pay which would have become unconditional on or after 19 July 2006 becomes unconditional before that date. This would mean that the relevant expenditure was incurred before 19 July 2006 and the lease would be an excepted lease. If this happens treat the expenditure as incurred on the date on which it would have been treated as incurred before the variation.

More definitions

These are definitions that apply for the transitional provisions.

A lease is finalised on the earliest day on which all of these conditions are satisfied.

  1. There is a contract in writing for the lease between the lessor and lessee.
  2. Either the contract is unconditional or, if it is conditional, the conditions have been met.
  3. No terms remain to be agreed.

 

An asset is under construction at in time in the period that begins when construction of the asset begins and ends when construction is complete. If an asset consists of two or more component parts it is under construction after the start of construction of any component part that was identified as a component part before construction of that part begins.

A leased asset is not under construction at any time after commencement of the term of the lease.

A combined asset is an asset that meets these conditions.

  1. The asset is for use individually.
  2. It consists of two or more items of plant or machinery. These are known as constituent assets.
  3. Each of the constituent assets is constructed to be used with the other constituent assets as part of the combined asset.

 

Do not treat an asset that can be used individually as a constituent asset just because it is one of a number of similar assets each of which is intended for use individually and that use individually is to be co-ordinated to any extent.

If you have a mixed lease CA23835 first check whether it is an excepted lease. If it is, neither the long funding lease legislation nor the transitional rules will apply to it.

If it is not an excepted lease apply the tests in CAA01/S70L and S70M CA23835 and decide for each derived lease whether it is an excepted lease.

These are the principal terms of a lease:

  1. the identity of the lessee,
  2. the identity or description of the asset to be leased,
  3. particulars, or a description, of the rentals payable under the lease,
  4. particulars, or a description, of the term of the lease.