1.Section 65 and Schedule 33 introduce legislation to prevent the avoidance of tax involving long funding leases of films.
2.Paragraph 1 introduces new section 502GD into the Income and Corporation Taxes Act 1988 (ICTA).
3.New section 502GD provides that where a company is (or has been) the lessor of a film, the taxation of its rental income from those leases is not affected by the rules that apply to long funding leases.
4.Paragraph 2 introduces new section 148FD into the Income Tax (Trading and Other Income) Act 2005 (ITTOIA). It is the income tax equivalent of section 502GD of ICTA.
5.New section 148FD provides that where a person is (or has been) the lessor of a film the taxation of its rental income from those leases is not affected by the rules that apply to long funding leases.
6.Paragraph 3 gives the commencement rules for paragraphs 1 and 2. These paragraphs only apply where the inception of the long funding lease is on or after 13 November 2008. The meaning of ‘inception’ is given by section 70YI(1) of the Capital Allowances Act 2001 (applied by paragraph 9 of this Schedule).
7.Paragraph 4 introduces paragraphs 5 to 8 of the Schedule. These paragraphs provide transitional rules that apply to long funding finance leases of films, the inception of which was before 13 November 2008 and which have not ended by that date.
8.Paragraph 5 applies to certain chargeable periods and disapplies the rules that restrict the amount of a lessor’s income that may be taxed under a long funding finance lease.
9.Paragraph 5(1) disapplies the rules in section 502B of ICTA (in the case of corporation tax) or section 148A of ITTOIA (in the case of income tax). This transitional rule applies to periods of account that meet the conditions in paragraph 5(2).
10.Paragraph 5(2) provides that this paragraph only applies to periods of account that begin on or after 13 November 2008 and to which no part of any rental due to be paid before that date refers.
11.Paragraph 6 provides further transitional rules that apply to lessors where paragraph 5 does not apply to the chargeable period.
12.Paragraph 6(1) provides that the paragraph applies to chargeable periods that end on or after 13 November 2008 and to which paragraph 5(2) does not apply. Where this sub-paragraph applies the lessor is treated as receiving an amount of income in addition to that which is brought into account as representing the finance charge element of the lease rentals. This amount is known as the relevant amount.
13.Paragraph 6(2) defines the “relevant amount” as the proportion of the ‘capital’ element of the rentals (referred to here as that part of the rentals as would not reasonably be regarded as reflected in the rental earning for that period of account) which are payable on or after 13 November 2008 and which relate to the period of account.
14.Sub-paragraph (3) applies for the purpose of sub-paragraph (2) where a rental is paid for a period of time that begins before 13 November 2008 and does not fall wholly within the period of account. Where this sub-paragraph applies the rental is apportioned to the period of account on a time basis.
15.Paragraph 7 provides that (where the conditions in paragraph 4 are met) section 502C of ICTA or section 148B of ITTOIA do not apply. These sections apply for corporation tax and income tax respectively and make provision for the taxation of exceptional items arising in connection with the lease.
16.Paragraph 8 applies where the conditions in paragraph 4 are met and ensures that a lessor is entitled to an appropriate deduction if it makes a refund of rentals at the end of the lease term.
17.Paragraph 8(1) provides that if a deduction in respect of a refund of rentals (described as a sum calculated by reference to the termination value) is otherwise prohibited by section 502D of ICTA or section 148C of ITTOIA then a deduction in respect of that refund is allowed.
18.Paragraph 8(2) provides that the amount of the deduction is limited to the amount brought into account in computing income under paragraph 5 or 6 of this Schedule.
19.This section and Schedule counter avoidance involving the leasing of films under long funding leases of plant or machinery.
20.Partnerships typically acquired or produced films and leased them to other companies to be exploited over a period of up to 15 years (referred to here as “sale and leaseback arrangements”). The partnerships were able to claim relief for the cost of those films under section 42 of the Finance (No.2) Act 1992, section 48 of the Finance (No.2) Act 1997 or sections 138 to 140 of ITTOIA.
21.The rents under the lease are taxable and, in effect, these sale and leaseback arrangements allow the partners to defer their tax liability for up to 15 years.
22.The avoidance involves the partnerships ending the existing leases and replacing them with new leases that are intended to qualify as long funding finance leases of plant or machinery.
23.If these new leases are long funding finance leases the majority of the rents receivable will not be taxed as section 148A of ITTOIA (for income tax) or section 502B of ICTA (for corporation tax) will apply. In effect, the partnerships will have replaced a taxable income stream with one that is largely untaxed.
24.Although the known avoidance involves partnerships, it is possible that others could seek to avoid tax using the same methods. Therefore the new rules are not limited to partnerships.
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