PRT: allowable field expenditure - anti-avoidance provisions: sale and leaseback
FA99\S95 and S97
A company with an interest in the North Sea may raise finance by selling an asset (or an interest in one) and then leasing it back. The lease rentals represent repayment of the borrowed capital (the sale proceeds) and the interest thereon. Sale proceeds from qualifying assets are liable to PRT, and the lease rentals may qualify for relief provided the purpose of the payment falls within OTA75\S3(1) and OTA75\S4, or OTA83\S3.
FA99\S95 to S97 contain provisions to counter two devices that exploited loopholes in the PRT legislation. The provisions apply to the sale of North Sea assets on or after 9 March 1999, unless the sale takes place under an unconditional contract entered into before that date, or under a conditional contract and the condition is satisfied before that date.
Exploitation of safeguard
The first device (without any counteracting legislation) exploited safeguard relief, (see OT17550) as follows:
A company sells an asset (say a North Sea platform) during a safeguard period, thus sheltering from a PRT charge the whole or a part of the consequent disposal receipt. It then leases back the asset, securing relief on its lease payments in respect of the continuing use of the asset. The company thus obtains double relief for the same asset: once for the expenditure incurred when the asset was originally acquired, and once again for the finance lease payments. At the same time it does not pay PRT on the disposal proceeds which might otherwise balance the capital element of the lease payments.
FA99\S95 to S97 close this loophole by denying relief for the lease payments where the sale proceeds have not been subject to an effective PRT charge. This is done by placing a ‘cap’ on the total amount of PRT relief allowable on expenditure related to the asset. Where the PRT liability for the disposal period has been reduced by safeguard relief, the cap is equal to the lower of
- the marginal amount of PRT payable on the disposal proceeds divided by the PRT rate for that period
- and the disposal proceeds.
Thus, if no PRT is paid on the disposal proceeds, because of the operation of safeguard, then none of the lease payments will be allowable. If PRT is paid on only a proportion of the disposal proceeds because of the operation of safeguard, relief will be given on a proportion on the lease payments.
The cap operates on an aggregate basis, so the rentals are only restricted once the cap is reached. Should the cap be recalculated (for example because expenditure is allowed on appeal) and the new cap is lower than the lease rental payments already allowed, the excess relief is not recovered. This is intended to avoid administration and compliance costs.
Where lease payment claims fall to be allowed in the chargeable period in which the disposal is made, it is particularly important that the PRT liability is known as accurately as possible at the time the claim decision is made. It follows that any decision on the lease rentals should be made as close as possible to the end of May or November.
Relief for interest via sale and leaseback
The second device used sale and leaseback to obtain PRT relief for interest payments. Interest payments are not an allowable expense for PRT purposes but prior to FA99 companies were able to use sale and leaseback deals to raise finance and effectively obtain relief on the interest element of lease payments, subject to OTA75\S3 and OTA75\S4, and OTA83\S3 being satisfied. Companies are now denied relief for lease payments that exceed the sale proceeds. Even where disposal proceeds are not sheltered by safeguard, no relief will be given for lease payments in excess of the disposal receipts (the ‘cap’).
The legislation applies equally to both sale and leasebacks involving third parties and to those involving connected persons, e.g. where the asset is leased back by a person connected (under ICTA88\S839) with the seller.
There are provisions for apportioning the cap where the asset is used in connection with more than one field.
The legislation continues to apply if the sale and leaseback is followed by a transfer of the field interest. The company that has newly acquired the field interest is treated as if it were the company that originally sold and leased back the asset, and as if the new lease for the use of the asset were the original lease. The new lessee steps into the shoes of the previous lessee and inherits his cap on lease payments and his history of lease payments already allowed. This applies to any subsequent transfers of the field interest. If there is a partial transfer of the interest, the transferee inherits the appropriate proportion of the transferor’s cap and lease payments.
The cap does not apply to ‘operating expenditure’ (as defined in FA99\S97) e.g. where a platform is leased back fully crewed, and the lease rentals reflect the provision of the crew. The element of the lease rentals relating to such expenditure is that which is judged just and reasonable and which the lessee or his successor would (or might have) incurred had there been no finance leasing arrangement, and it had been the owner of the asset.