Background Note
38.Schedule 32 counters disclosed avoidance schemes involving the leasing of plant or machinery. HMRC does not accept that these schemes achieve their aim. In addition it amends legislation covering the tax position of a lessee at the end of a long funding lease and makes small changes to the definitions of “sale and leaseback” and “sale and finance leaseback”.
The lease and long funding leaseback schemes
39.The lease and leaseback avoidance involves an asset owner who has claimed capital allowances on that asset granting a long funding finance lease of the asset to another person who leases the asset back to them under a long funding operating lease. The intention is that the lessor receives a lump sum that is commercially equivalent to a loan which is neither taxed as income nor brought into their capital allowances computation, leaving the lessor with a continuing entitlement to capital allowances over and above the net cost of the asset to them. The timing of the benefit can be enhanced if the lessee under the leaseback can claim a first year allowance.
40.This measure will ensure that the person granting the long funding lease is taxed on the lump sum received and that on reacquisition there is capital allowance symmetry. It also removes the lessee’s entitlement to first year or annual investment allowances.
The sale and long funding leaseback scheme
41.The sale and leaseback avoidance scheme is also based on arrangements that are commercially equivalent to a secured loan. An owner sells plant or machinery used in their business to a finance provider and leases it back when it is worth more than its original cost to the owner. The aim is that the seller will obtain increased capital allowances entitlement where in substance they have received a loan and there has been no change in the use of the asset.
42.This measure provides a rule that limits the qualifying expenditure that can be claimed by the lessee under the long funding leaseback to the amount that has been brought in as disposal proceeds by the seller (or head lessor). Where the seller or head lessor has not claimed capital allowances the qualifying expenditure will be limited to the lower of market value or the cost, to the seller, of the plant or machinery.
Lessees under long funding leases
43.Lessees under a long funding lease are entitled to claim capital allowances and when the lease ends a disposal value must be brought into account. The disposal rules (in section 70E of CAA) do not work as intended and give an unintended tax benefit in certain circumstances.
44.This measure provides a revised formula for calculating the disposal proceeds to be brought into account by the lessee under a long funding finance lease. In addition the disposal rules at section 70E of CAA now ensure that a lessee who emigrates during the period of the long funding lease brings into account an appropriate disposal value.
The “sale and leaseback” and “sale and finance leaseback” definitions
45.The definitions of “sale and leaseback” and “sale and finance leaseback” at sections 216 and 221 of CAA are aimed at avoidance involving connected party leasing arrangements that:
seek tax relief in excess of the cost to the seller’s group, or
effectively sell capital allowance entitlement to third parties.
The existing definitions do not cover arrangements involving the leaseback to a person connected to the seller who is already leasing the asset and continues to do so.
46.This measure amends the definitions to ensure that they include arrangements involving a leaseback to a continuing user of the asset.
