The measure

A tax deferral can arise 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 (now Chapter 3 Part 9 of CTA 2010) 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. Selling the company to a loss-making group before the taxable profits arose enabled the future (deferred) tax liability that would otherwise crystallise over time to be avoided. The provisions of Schedule 10 can be triggered by any change in the relationship between a company which uses assets for leasing or derives income from leasing and its 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 assets 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 Pre-Budget Report 2009, HMRC announced the introduction of a relieving provision to offer leasing companies an option to elect for alternative treatment to the Schedule 10 charge and subsequent deduction. Given the current economic climate, the effective benefit of the deduction which Schedule 10 creates may be reduced due to a lack of profits to offset against the deduction arising in the purchasing group. The proposed measure allows leasing companies to elect that instead of triggering a deemed income charge at the time of 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.

A revised draft of the legislation was published today.

The Government made changes to ensure that the election has the intended effect. In particular:

• that the effects of the ring fence are not brought to an end unless the full amount of deferred income calculated is brought into charge to tax (applicable to leasing companies owned by consortia);
• to prevent companies who have made the election from being treated as a tonnage tax company (which would prevent the deferred profits of a leasing business from being brought into tax); and
• that the rules bring the treatment of a lessor CFC into line with the treatment of a UK resident lessor.

The government also introduced a change to the option to elect to ensure that expenditure unconditionally contracted for before 9 December 2009 should not be prevented from qualifying for capital allowances.

Who will be affected?

The sale of lessor rules and the option to elect 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 option to elect rules announced in Pre Budget Report 2009 have effect for transactions where the relevant day (ie the date of the change of ownership) falls on or after 9 December 2009. The changes announced today to ensure the legislation operates as intended operate in each case by reference to today (24 March 2010) although their precise timing of effect varies in each case. The changes relating to unconditional contracts entered into before 9 December 2009 are deemed to always have had effect from the date the draft legislation was published on 9 December 2009.