Mismatched lease chains
Draft legislation announced in December 2007 is intended to counter
advantages gained where intermediate lessors of plant or machinery realise a
loss for tax purposes where no commercial loss arises.
For example, where A leases plant or machinery to B and B sub-leases to C,
if from B’s perspective the head lease is not a long funding lease (as
defined in existing legislation) but the sub-lease is, then B would be
entitled to a full deduction for the rentals payable under the headlease but
would only be subject to tax on the finance charge (or interest) element of
the rentals it receives from C, thereby creating a tax loss.
The intention of the new provisions is to ensure that rentals received by
intermediate lessors are taxed on the same basis as rentals paid.
The counter-measures will operate in three ways:
Where a lessee under a plant or
machinery lease that is not a long funding lease enters into a long
funding sub-lease on or after 13 December 2007 all of the sub-lease
rentals will be taxed in full
Where a lessee under a plant or
machinery lease that is not a long funding lease is a lessor under a
long funding sub-lease at the beginning of 13 December 2007, it will be
taxed in full on sub-lease rentals so far as they are due on or after 13
December 2007 and refer to periods after 12 December 2007
In normal circumstances, a lease which
meets the conditions to be a long funding lease will only actually be a
long funding lease in the hands of the lessee if the lessee chooses to
treat it in its appropriate tax return as such. Where the lessee also
enters into a long funding sub-lease as lessor on or after 13 December
2007, the headlease will be taxed in the hands of the lessee as a long
funding lease and it will no longer have the option of choosing to be
taxed on it as a non-long funding lease.
Grant of a lease for a premium
Draft legislation announced in December 2007 is intended to bring premiums
and other “capital” receipts made on or after 13 December 2007 into the
charge to tax as income in the hands of a lessor. These receipts may
otherwise escape tax because:
- They are not brought in as a disposal
value for capital allowances purposes (thereby allowing the lessor to
continue claiming capital allowances on the balance of its original
- They fall to be taxed under the
chargeable gains regime with the majority of the cost of the asset
available to set against the disposal proceeds.
The measure will also counter attempts to reduce or avoid a disposal
value for capital allowances and chargeable gains purposes.
The scope of the new draft legislation is to be broadened from 12 March 2008
to include plant or machinery leased with land and buildings (which are not
Additionally where the lease is granted on or after 12 March 2008, a lessor
under a long funding lease is prevented from reducing its disposal value for
capital allowance purposes (being the net investment in finance lease
receivables) by matching the lease receivables with a liability.
Sale and finance leaseback
Draft legislation published on 9 October 2007 was intended to prevent
taxpayers moving the entitlement to claim capital allowances by entering
into a sale and leaseback which was not a long funding lease. The
arrangements treat all finance leasebacks which are part of a sale and
leaseback arrangement as long funding leases even if they would not
otherwise meet the conditions to be a long funding lease. Accordingly the
lessor will not be entitled to capital allowances except where the plant &
machinery is “new” (less than 4 months old).
The new legislation will apply to sale and finance leaseback transactions
entered into on or after 9 October 2007. Section 222 CAA 2001 will be
repealed so that a full disposal value will be brought into account upon
disposal (in accordance with the usual rules where a company sells and
finance leases back plant or machinery).
Lease and finance leaseback
The above rules which apply to sale and finance leasebacks have been
extended so that on or after 12 March 2008 they will also apply to
leasebacks where there is a lease and leaseback.
These changes were expected since most of them were announced in 2007.
The measures were introduced to tackle particular structured leasing
transactions which we understand have come to HMRC’s attention through
the disclosure regime. Whilst some draft legislation was published in
October and December 2007, some concerns have been brought to HMRC’s
attention by Deloitte as to whether the draft legislation
unintentionally caught genuine commercial transactions. The
announcements today did not address those concerns. We therefore look
forward to further draft legislation being published.