Sale of Lessor Companies: Alternative Arrangements and Consortium Arrangements
PBRNs 10 and 11
The measure
A tax deferral often arises in certain leasing companies because of the profile of capital allowance deductions versus the profile of taxable income. This often results in such companies not paying tax in respect of rental income in the early years of a lease. Schedule 10 FA 2006 was introduced to seek to prevent groups with leasing companies from turning the temporary timing benefit into a permanent benefit by selling leasing companies which were about to start to pay tax due to the reversal of the timing benefit to loss making groups. Selling the company to a loss-making group before the period of taxable profits used to enable the future (deferred) tax liability that would otherwise crystallise to be avoided. The provisions of Schedule 10 can be triggered by any change in the relationship between a company which uses assets or derives income from leasing and ultimate 75% parent or consortium members. Similar provisions apply on the sale of certain partnership interests.
Schedule 10 creates a deemed income charge broadly equal to the difference between the tax written down value of plant and machinery and the book value of the fixed assets or finance lease receivable which arises in the company on the day prior to the change in relationship. A corresponding deduction is available for the leasing company immediately after the change in relationship with restrictions on the way in which that deduction may be utilised, so that for a UK tax paying purchasing group it is intended that Schedule 10 should produce only a timing disadvantage.
In Budget 2009, the Government introduced relieving provisions which were designed to address concerns that purchasers of leasing companies may not be able to utilise the deduction created by Schedule 10 within the maximum 2 year period for which it was possible to group relieve the deduction. The Government extended the period over which a purchasing group can relieve the deduction created by Schedule 10 as group relief to 6 years.
Two changes are announced today. The first is a relieving provision to offer leasing companies an option to elect for alternative treatment to the Schedule 10 charge and deduction. Given the current economic climate and the fact that many groups are experiencing a reduction in their taxable profits, the effective benefit of the deduction which Schedule 10 creates may be reduced due to a lack of profits to offset. The proposed measure allows leasing companies to elect that instead of triggering a deemed income charge on the change of ownership, the profits of the leasing business shall be ring fenced following the change in ownership and the new group will not be able to offset losses arising in other group companies or from other activities of the new group or new leases written by the leasing company against the profits arising to the leasing company from the leasing business as at the change of ownership
The second measure is an anti-avoidance provision designed to prevent groups from selling leasing companies without triggering the full Schedule 10 charge. The measure is addressed as specific avoidance which sought to reduce the Schedule 10 charge by up to 74% by using relieving provisions in Schedule 10 which sought to avoid a Schedule 10 charge triggering if an intermediate holding company is introduced between a leasing company and consortium members. The measure ensures that companies can no longer use the relieving provisions to partly avoid a Schedule 10 charge arising upon the change in ownership.
Who will be affected?
The changes announced today may affect groups with companies which have a business of leasing plant or machinery (for example equipment hire, intragroup equipment leasing companies and in-house vendor finance providers) as well as those looking to purchase and sell such companies.
When?
The new provisions have effect for transactions where the relevant day (i.e. the date of the change in relationship) falls on or after 9 December 2009.
These changes will only apply to changes in the shareholding of certain companies or partnership interests who have a business of leasing including hiring out plant and machinery.
Whilst the first new measure is welcomed as going some way towards preventing the adverse consequences which Schedule 10 can create in commercially motivated changes of ownership of leasing companies, the changes do not go as far as we would like. In order to prevent Schedule 10 having an adverse impact on entirely commercially motivated sales of leasing businesses (in particular where the purchaser is a loss maker) we have always considered that a general anti-avoidance or commercial purpose test should be included in Schedule 10.
The second measure is likely to prevent the use of a particular structure designed to reduce the impact of Schedule 10 and is, therefore, unlikely to have a wide application.
