Sale of lessor companies: anti-avoidance and
fairness
The measure
Further to consultation following the publication of the Discussion paper by HMRC on 29 July 2008 regarding certain unintended consequences of Schedule 10 FA 2006, the Government has published new draft legislation to make changes to Schedule 10 FA 2006 (the 'Sale of Lessor' rules).
Sch 10 FA 2006 was introduced to create an income tax charge upon the sale of a company carrying on a qualifying business of leasing plant/machinery. For leasing companies which typically show a period of tax losses at the beginning of a lease, when tax deductions exceed taxable rental income, this timing benefit reverses in subsequent periods as tax deductions reduce compared with taxable rental income: selling the company to a loss-making group before the period of taxable profits begins enabled the future (deferred) tax liability that would otherwise arise to be avoided, and it is the sale of leasing companies that Sch 10 targets. Similar provisions apply on the sale of certain partnership interests. Sch 10 creates a corresponding deduction for the leasing company immediately after the sale with restrictions on the way in which that deduction may be utilised, so that for a UK tax paying purchasing group within it is intended that Sch 10 should produce only a timing disadvantage.
The changes include relieving provisions and are designed to ensure that Schedule 10 has the intended effect in relation to certain transactions involving partnerships and consortia. The relieving provisions address concerns that purchasers of leasing companies may not be able to utilise the deduction created by Schedule 10 within the current time period for which it is possible to group relieve the deduction. The Government have introduced draft legislation which extends the period over which a purchasing group can relieve the deduction created by Schedule 10 as group relief from up to 2 years following the purchase to up to 6 years.
We are still awaiting any updates to the draft legislation published in November 2008 in respect of the anti-avoidance measures announced at that time which counteract specific planning in relation to certain sale and leasebacks and chains of leases intended to enable a sale of a leasing company without triggering a tax charge under Schedule 10 FA 2006. Those measures target Schedule 10 planning where the group has separated legal title to the assets from the entitlement to capital allowances using a Long Funding Lease; also structures involving long funding operating leases where, absent the new draft legislation, a Schedule 10 charge may not arise because the assets have no balance sheet value. In such a case market value will be deemed to be the balance sheet value.
Who is affected?
The changes announced today may affect both 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 relating to partnerships and consortia apply for changes of ownership on or after 22 April 2009. The extension of the entitlement to group relieve the deduction applies to losses incurred in accounting periods ending on or after 22 April 2009.
These changes will only apply to the purchase and sale of certain companies or partnership interests who have a business of leasing including hiring out plant & machinery.
The changes do not go as far as Deloitte would like in terms of preventing Schedule 10 having an adverse impact on the commercially motivated sale of leasing businesses. In particular, they do not introduce a general anti-avoidance or commercial purpose test to Schedule 10 which Deloitte suggested during the consultation process. Nor has the Government replaced Schedule 10 with a ring fence in the Purchaser allowing new leasing to be written in the ring fenced trade (although this option is being kept under review).
The increased flexibility around set-off of the Schedule 10 deduction will not ameliorate the position of entities with no UK tax base, such as infrastructure funds or European/other traders who do not have other UK operations against which to relieve the deductions.
