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HMRC internal manual

Capital Allowances Manual

PMA: Anti-avoidance: Election for revised qualifying expenditure in sale and leaseback cases

CAA01/S227 - S228

The restriction on the buyer’s qualifying expenditure is sometimes eased in a sale and leaseback case CA28300 or a sale and finance leaseback case CA28550. It is eased if an election is made. The election must be made by notice to HM Revenue and Customs not later than 2 years after the date of the sale and leaseback. If an election is made it is irrevocable.

These are the conditions that must be satisfied for an election to be possible:

  • The seller incurred capital expenditure on the asset.
  • The asset was new when the seller acquired it.
  • The asset was not acquired by the seller in a connected persons transaction or a transaction to obtain allowances.
  • The sale takes place not more than 4 months after any person first brings the asset into use for any purpose.
  • The seller has not claimed capital allowances on capital expenditure incurred on the provision of the asset.


Where an election is made the buyer’s qualifying expenditure is the smallest of:

  1. the buyer’s actual expenditure,
  2. capital expenditure incurred by the seller on the asset,
  3. capital expenditure incurred by anyone connected with the seller on the asset.

A local authority may buy an item of plant, intending that it should be sold and leased back under an operating lease, but the sale and leaseback may not take place for some time after the initial acquisition by the authority. If so, the market value of the plant when the sale and leaseback takes place will, typically, be less than its cost.

Subject to the following paragraphs, the 4 months rule above is not relevant to a sale and operating leaseback undertaken by a local authority, saving only the exceptional case where the equipment is leased back for use in a trade carried on by the local authority.

You may have a case where a local authority enters into a sale and leaseback and the lease is classified as a finance lease in the lessor’s accounts even though the local authority treats it as an operating lease. The definition of sale and finance leaseback in CAA01/S221 and CA28500 considers only the accountancy treatment of the transaction in the accounts of the lessor and connected persons. This means that if the lessor or persons connected with the lessor treat the lease as a finance lease in their accounts (including consolidated accounts in which their results are included) the transaction is a sale and finance leaseback. The 4-month rule may be relevant in a case like that.

But where you have a sale and leaseback undertaken by a non-trading local authority, the 4 months rule has no relevance where the lease is not a finance lease in the accounts of the lessor or any connected person (or in consolidated accounts in which their results are included).

Activities carried out by a local authority in the performance of its statutory duties would not normally be regarded as trading. But other activities may have the characteristics of a trade, for instance where the local authority successfully tenders to provide refuse collection services for another authority.


  • a non-trading local authority acquires an item of machinery or plant with the intention that it should be sold and leased back,
  • the lease is an operating lease in the lessor’s accounts,
  • the price at which the asset is sold to the lessor does not exceed the cost to the local authority, and
  • the sale and leaseback takes place as soon as practicable, taking account of the need to batch sufficient items of plant to obtain a competitive financing deal,

then you should not use the fact that the asset has a market value lower than cost as a reason for applying the sole or main benefit rule in CAA01/S215 CA28300 to restrict the capital allowances available to the lessor.