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HMRC internal manual

Capital Allowances Manual

PMA: Fixtures: Equipment lease, equipment lessor, equipment lessee

CAA01/S174 & S177 - S180

An ‘equipment lease’ is an agreement under which a person who does not have an interest in the relevant land incurs capital expenditure on the provision of a fixture and leases it, directly or indirectly, to another person. A lease entered into as a result of an agreement like that is also an equipment lease.

The person from whom the fixture is leased under an equipment lease is an ‘equipment lessor’. Basically, an equipment lessor is a person who incurs capital expenditure on the provision of a fixture for leasing but does not have an interest in the relevant land.

The person to whom the fixture is leased directly or indirectly is an ‘equipment lessee’.

Example

The lift in Kane House was installed by the Redding Lift Company, which leases it to Budokan Computers but does not have an interest in Kane House. The Redding Lift Company is the equipment lessor. Budokan Computers is the equipment lessee. The lease of the lift by the Redding Lift Company to Budokan Computers is an equipment lease.
 

If an equipment lessor incurs expenditure on a fixture, the equipment lessor is treated as owning the fixture at the time when the expenditure is incurred if the following conditions are satisfied:

  • the equipment lessor and equipment lessee make an election under s177, CAA01
  • the equipment lessor and equipment lessee are not connected persons
  • either the equipment lessee is carrying on a qualifying activity and the further conditions below are satisfied; or the equipment lessor has the right to sever the fixture, which is not part of a building and the further conditions below are satisfied; or the equipment lease is part of the affordable warmth programme and the further conditions below are satisfied.

If the equipment lessor incurs the expenditure before the equipment lessee begins to carry on a qualifying activity the equipment lessor is treated as owning the fixture from the time when the equipment lessee’s qualifying activity begins.

These are the time limits for the election:

  • income tax - on or before the first anniversary of 31 January after the tax year in which the expenditure on the fixture was incurred ends;
  • corporation tax - not later than 2 years after the end of the chargeable period in which the expenditure on the fixture was incurred.

Equipment lessee is carrying on a qualifying activity

These are the further conditions to be satisfied if the equipment lessee is carrying on a qualifying activity:

  • the equipment lease is for the purposes of a qualifying activity that the equipment lessee carries on or is going to carry on
  • if the equipment lessee had incurred the expenditure on the fixture, the expenditure would have qualified for PMAs
  • the equipment lease is not a lease of the fixture for use in a dwelling house.

Equipment lessor has right to sever the fixture and the fixture is not part of a building

These are the further conditions that have to be satisfied where the equipment lessor has the right to sever the fixture and the fixture is not part of a building:

  • the fixture is fixed to land that is neither a building nor part of a building
  • the equipment lessee has an interest in the land
  • the equipment lessor is entitled to sever the fixture at the end of the lease
  • once the fixture has been severed the equipment lessor will own it
  • the nature of the asset and the way in which it is fixed mean that it can be used again for the same purposes once it has been severed
  • normal accountancy practice would treat the lease as an operating lease in the equipment lessor’s accounts if the lessor were a company incorporated in the UK
  • the lease is not the lease of the asset for use in a dwelling house.

The sort of assets this covers are items like the assets in the case of ‘J C Decaux vFrancis’ (SPC 84). Decaux hired out street equipment to local authorities - portaloos (automatic toilets), bus shelters, advertising columns and information signs, all installed on Local Authority land. The portaloos were rented to the Local Authority; the other items were provided on the basis that Decaux could hire out the advertising space. Decaux had right of access for repair and maintenance purposes. The equipment was installed on the land to ensure stability and allow connection to utilities. They could be, and were, moved or replaced with reasonable ease. The items were held to be fixtures because of the firmness of attachment and purpose to be an amenity to and improvement to the land.

Equipment lease is part of affordable warmth programme

These are the further conditions that have to be satisfied when the equipment lease is part of the affordable warmth programme.

  • the equipment lease is of a boiler, heat exchanger, radiator or heating control that is installed in a building as part of a space or water heating system
  • the equipment lessor’s expenditure is incurred before 1 January 2008
  • the equipment lease is approved as entered into as part of the affordable warmth programme.

Approval is given by the Secretary of State apart from:

  • buildings in Scotland - approval is given by Scottish ministers
  • buildings in Wales - approval is given by the Welsh assembly
  • buildings in Northern Ireland - approval is given by the Department for Social Development in Northern Ireland.

 If approval is withdrawn, treat it as if it had never been given.