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Anti-avoidance to tackle certain sale and finance leaseback transactions
which fell within section 222 CAA 2001
Anti-avoidance aimed at transactions which create tax losses where there is
a commercial profit
Changes to
the Sale of Lessors rules
Anti-avoidance to tackle certain sale and finance leaseback
transactions which fell within section 222 CAA 2001
HMRC has introduced new draft legislation intended to counter two schemes
which exploited section 222 CAA 2001 to restrict the disposal value required
to be brought in for tax purposes of plant and machinery sold to the tax
written down value.
The schemes avoided triggering a full claw back of capital allowances on the
disposal of valuable plant or machinery to a non-UK resident.
Section 222 was originally introduced to prevent a company which could not
obtain a benefit from capital allowances (for example because it was loss
making) transferring the capital allowance entitlement by selling the plant
& machinery to a taxpayer who could utilise the benefit of capital
allowances. The assets would then be leased back for reduced rentals which
reflected the benefit of capital allowances to the lessor.
The new legislation will apply to sale and finance leaseback transactions
entered into on or after 9 October. The legislation repeals section 222 CAA
2001 completely so that a full disposal value will be brought into account
in accordance with the usual rules where a company sells and finance leases
back plant or machinery.
The transfer of capital allowances is now prevented by a different technique
following the repeal of s222. In future, with the exception of “new” plant &
machinery (see below) finance leasebacks under a sale and finance leaseback
will be treated as long funding leases. Accordingly the lessor will not be
entitled to capital allowances except where the plant and machinery is “new”
(less than 4 months old).
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Our view
Lessors acquiring used plant or machinery to lease back to the original
owner will need to consider how these anti-avoidance rules may affect
their entitlement to capital allowances, even where the lease is a short
term lease that would otherwise be excluded from the long funding lease
rules. |
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Anti-avoidance aimed at transactions which create tax losses where
there is a commercial profit
HMRC also introduced anti-avoidance to tackle schemes whereby a sub lessor
in a lease chain realises a tax loss where there is a commercial profit (or
a smaller commercial loss) either by:
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Obtaining a trading deduction for the cost of an
asset but only being taxed upon the finance element of rentals received
under a long funding lease; or
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where over the lease term there is a substantial
difference between the GAAP profits and the tax result; that difference
was to some extent a result of the “ceiling” in the long funding lease
rules applying and that difference was a main purpose of the
arrangements.
In each case the new rules remove the “ceiling” in the long funding lease
rules which would otherwise apply to restrict the lessor’s taxable income.
The changes take effect in the case of 1. if deductions arise after 9
October (with just and reasonable adjustment) and in the case of 2. if
arrangements are entered into on or after that date.
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Our view
The ceiling in the long funding lease rules which restricts the income
taxable upon a lessor to the finance element of rentals received was
intended by HMRC only to apply where the lessor receives no deduction
for the capital cost of the asset via capital allowances. The new
legislation deals with the situation where a deduction is available for
the capital cost of the asset otherwise than by the capital allowances
system which brings it in line with the policy objective of the long
funding lease rules. |
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Changes to the Sale of
Lessors rules
FA 2006 brought in rules aimed at so called “leasetail” transactions.
Leasetail transactions were used by lessors to permanently defer the tax in
respect of rentals under leases. A lease will often not create taxable
profits in its early years since capital allowances are in excess of rentals
received under the lease. In the latter years of a lease capital allowances
are usually less than rentals received so the lessor becomes taxable on the
excess of lease rentals above capital allowances. By selling a portfolio of
leased assets (or even the rental stream) to a loss making business, the
loss maker could use its losses to shelter the tax which would become
payable in the latter years of a lease and hence avoid ever paying tax on
the commercial profit on such lease rentals.
The sale of lessor rules provide that a charge equal to the difference
between the accounting value of the plant or machinery and the tax written
down value (effectively the deferred tax balance) crystallises as a cash tax
liability where the ownership of a leasing company changes.
Although there is no commercial purpose test for the sale of lessor rules to
apply there is an equal and opposite tax deduction available to the leasing
business which in theory brings neutrality where the transaction is
commercially driven.
New draft legislation published by HMRC seeks to amend the sale of lessor
rules to deal with certain situations involving the change in ownership of a
leasing business from a partnership to a company. In such a scenario the
legislation previously brought a charge upon the partnership disposing of
the leasing business but did not provide for an equal and opposite deduction
for the purchaser. The new legislation ensures that an equal and opposite
deduction is received by a company acquiring a leasing business from a
partnership.
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Our view
This legislation is intended to correct an inequality in the legislation
as previously published. |
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