Chapter 3: Leased trading assets
Overview
1031.This Chapter is based on sections 782 and 785 of ICTA.
1032.This Chapter applies where a person carrying on a trade, profession or vocation pays rent under a lease of an asset other than land or buildings and at any time before the lease was created the asset was used either (a) in that trade, profession or vocation or (b) in another trade, profession or vocation carried on by the person who then or later was carrying on the first trade, profession or vocation and, in either case, when so used was owned by the person carrying on the trade, profession or vocation in which it was used.
1033.If this Chapter applies, it provides that in computing the profits and gains of the trade, profession or vocation the deduction in respect of a payment under the lease must not exceed the commercial rent of the asset for the period for which the payment was made.
1034.This Chapter corresponds to Chapter 3 of Part 19 of CTA 2010, which makes similar provision for the purposes of corporation tax. It has the following structure.
Section 681C summarises the Chapter.
Sections 681CA and 681CB state when the Chapter applies.
Section 681CC restricts income tax relief and carries forward relief which has been denied.
Sections 681CD and 681CE supplement section 681CC.
Sections 681CF and 681CG are interpretative.
Section 681C: Overview
1035.This section summarises this Chapter. It is new.
1036.The word “lease” appears in this section for the first time in this Chapter. It is defined in section 681CF.
Section 681CA: Professions and vocations
1037.This section applies the Chapter not only to trades but also to professions and vocations. It is based on section 782(10) of ICTA. There is no corresponding provision in Chapter 3 of Part 19 of CTA 2010, which omits all references to companies carrying on professions or vocations. See the commentary on section 837 of CTA 2010 and Change 4 in Annex 1 to the explanatory notes on that Act.
Section 681CB: Leased trading assets
1038.This section states when this Chapter applies. It is based on section 782(1), (8) and (9) of ICTA.
1039.Subsection (1) introduces the three conditions relating to the application of this Chapter and explains their logical relationship.
1040.Subsection (2) specifies condition A, concerning the payment.
1041.In particular, under subsection (2)(a) the payment must be made under the lease of a “relevant asset”. The expression “relevant asset” appears in subsection (2)(a) for the first time in this Chapter. It is defined in section 681CG.
1042.Subsections (3) and (4) specify conditions B and C. These are two alternative conditions concerning the use to which the leased asset was put before it was leased.
1043.Subsection (5) preserves the rule that, if the lease was created before the legislation was first introduced, a lease-back after that date will not activate the legislation.
Section 681CC: Tax deduction not to exceed commercial rent
1044.This section restricts income tax relief. It is based on section 782(1) to (4) of ICTA.
1045.Subsection (3) brings the law into line with practice. See the commentary on section 681AA and Change 11 in Annex 1.
Section 681CD: Long funding finance leases
1046.This section makes an exception for long funding finance leases. It is based on section 782(1A) of ICTA.
Sections 681CE and 681CF: Commercial rent; lease
1047.These interpretative sections are based on sections 782(6) and (7) and 785 of ICTA.
Section 681CG: Relevant asset
1048.This section defines “relevant asset” for the purpose of this Chapter. It is based on the definition of “asset” in section 785 of ICTA.
1049.The source legislation uses the term “asset”, which is defined to exclude land and interests in land. Since many readers may find this counter-intuitive, this section uses the new term “relevant asset”.