Chapter 4: Leased assets: capital sums
Overview
1050.This Chapter is based on sections 781 and 783 to 785 of ICTA.
1051.It deals with cases such as that of a taxpayer who, having had tax relief in respect of a payment under a lease of an asset other than land or buildings, receives or has received at any time a capital sum in respect of the lessee’s interest in the lease.
1052.If the Chapter applies, income tax is charged on (broadly speaking) the amount on which relief has been obtained or, if less, on the capital sum.
1053.This Chapter corresponds to Chapter 4 of Part 19 of CTA 2010, which makes similar provision for the purposes of corporation tax. It has the following structure.
Section 681D summarises the Chapter.
Sections 681DA to 681DC state when the Chapter applies.
Sections 681DD to 681DF concern the charge to income tax.
Sections 681DG to 681DI deal with obtaining the capital sum.
Sections 681DJ and 681DK are about apportionment.
Sections 681DL to 681DP are interpretative.
Section 681D: Overview
1054.This section summarises this Chapter. It is new.
1055.The expressions “capital sum” and “lease” appear in this section for the first time in this Chapter. They are defined in sections 681DM and 681DN respectively.
Section 681DA: Application of the Chapter
1056.This section introduces the five conditions relating to the application of this Chapter and explains their logical relationship. It is based on section 781(1) of ICTA.
Section 681DB: Payment under lease
1057.This section specifies a necessary condition for the Chapter to apply, namely that a tax-deductible payment is made under a lease of a relevant asset. It is based on sections 781(1) and (3) and 782(1) of ICTA.
1058.The expressions “relevant asset” and “relevant tax relief” appear in subsection (1)(a) and (b) respectively for the first time in this Chapter. They are defined in sections 681DO and 681DP respectively.
1059.The person entitled to a deduction by way of tax relief under section 781(1)(a) of ICTA is not necessarily the person obtaining the capital sum and charged to tax under that subsection. It follows that, if the person obtaining the capital sum is charged to income tax, the person entitled to a deduction by way of tax relief is not necessarily an income tax payer. Subsection (1)(b) of this section therefore refers to “relevant tax relief”, rather than “relevant income tax relief”.
1060.Subsection (2) stipulates that if Chapter 3 of this Part applies to the payment then condition A is not met (and, therefore, this Chapter does not apply to the payment). For that reason, Chapter 3 appears in this Part before this Chapter, reversing the order of the source legislation.
1061.Subsection (3) similarly stipulates that if Chapter 3 of Part 19 of CTA 2010 applies to the payment then condition A is not met (and, therefore, this Chapter does not apply to the payment). Subsection (3) is unlikely to apply in practice, but omitting it would change the law to the taxpayer’s disadvantage.
1062.Subsection (4) preserves the rule that, if the lease was created before the legislation was first introduced, receiving a capital sum after that date will not activate the legislation.
Section 681DC: Sum obtained
1063.This section specifies four alternative additional conditions for the Chapter to apply. It is based on sections 781(1) and (9) and 783(3) of ICTA.
1064.All four of the conditions concern the obtaining of a capital sum by a person of the description specified in the condition. In particular, the person obtaining the capital sum need not be the person making the tax-deductible payment.
1065.In conditions B and C in subsections (1) and (2), the capital sum is obtained in respect of the lessee’s interest in the lease. In condition B, the capital sum is obtained by the person making the payment. In condition C, the capital sum is obtained by an associate of that person.
1066.Subsection (1)(a) is the first provision in this Chapter which refers to obtaining a sum in respect of an interest in a lease and, specifically, to obtaining a sum in respect of the lessee’s interest in a lease. The former expression is defined in section 681DG. The latter expression is defined in section 681DH.
1067.The word “associate” appears in subsection (2) for the first time in this Chapter. It is defined in section 681DL.
1068.In conditions D and E in subsections (3) and (4), the capital sum is obtained in respect of the lessor’s interest in the lease, or of any other interest in the asset. In condition D, the capital sum is obtained by an associate of the person making the payment. In condition E, the interest belongs to an associate of that person and the capital sum is obtained by an associate of that associate.
1069.Subsection (5) makes it clear that, for the purposes of this section, it is irrelevant when the payment is made.
1070.Subsections (6) and (7) relate to hire-purchase agreements for plant or machinery. Subsection (6) makes an exception to conditions B and C. Subsection (7) makes an exception to conditions D and E.
Section 681DD: Charge to income tax
1071.This section imposes the charge to income tax on the person obtaining the capital sum. It is based on section 781(1), (1A), (2) and (6) of ICTA.
1072.Under subsection (1) there is a charge to income tax for the tax year in which the sum is obtained.
1073.Subsection (2) measures the income thus charged.
1074.Subsection (3) introduces four subsections limiting the effect of subsections (1) and (2).
1075.Subsection (4) caps the amount charged.
1076.To prevent double taxation, subsections (5) and (6) ensure that once a payment (or part of a payment) has been taken into account in making a charge under this Chapter it cannot be taken into account in making a further charge in respect of another sum.
1077.Subsection (7) is a timing rule supplementing subsections (5) and (6).
Section 681DE: Hire-purchase agreements
1078.This section concerns hire-purchase agreements. It is based on section 784 of ICTA.
1079.This section may be in point if section 681DC(6) and (7) (sum obtained: exceptions for hire-purchase agreements) do not prevent this Chapter from applying. If this Chapter applies, subsection (1) states the conditions for this section to apply.
1080.Subsection (2) requires the total to be found of:
non-tax-deductible payments under the lease; and
if the lessee’s interest in the lease was assigned to the person before it obtained the capital sum in respect of that interest, any capital payment made by the person as consideration for the assignment.
1081.Under section 1008 of ITA, the references to assignment in section 681DE(2) are to be read in relation to Scotland as references to assignation, thus making explicit what is merely implicit in section 784(2)(b).
1082.The total found in subsection (2) is then compared with the capital sum. If it is equal to or greater than the capital sum, then under subsection (3) the capital sum is treated for the purposes of section 681DD(4) as £nil. If the total found under subsection (2) is less than the capital sum, then under subsection (4) it is deducted from the capital sum in applying section 681DD(4).
1083.Subsection (5) covers the special case in which the capital sum is the consideration for part only of the lessee’s interest in the lease.
1084.Section 784(4) of ICTA provides that:
“the amount to be deducted … shall be such proportion of the capital expenditure which is still unallowed as is reasonable (emphasis added).”
1085.Rewriting this, subsection (5)(a) requires the unallowed amount to be reduced to a proportion which is not only reasonable but also just. This is a minor change in the law: see Change 5 in Annex 1.
1086.To prevent double relief, subsections (6) and (7) ensure that if a payment has been taken into account under subsection (2) in respect of a capital sum it cannot be taken into account in respect of another capital sum.
1087.Subsection (8) is a timing rule supplementing subsections (6) and (7).
Section 681DF: Adjustments where sum obtained before payment made
1088.This section provides for adjustments to be made if a capital sum is obtained as mentioned in section 681DC and later a payment is made as mentioned in section 681DB. It is based on section 781(7) to (8A) of ICTA.
Section 681DG: Sum obtained in respect of interest
1089.This section is concerned with the meaning, in this Chapter, of “a sum obtained in respect of an interest in an asset”. It is based on section 783(1) and (2) of ICTA.
Section 681DH: Sum obtained in respect of lessee’s interest
1090.This section is concerned with the meaning, in this Chapter, of “a sum obtained in respect of the lessee’s interest in a lease of an asset”. It is based on section 783(1) and (2) of ICTA.
Section 681DI: Disposal of interest to associate
1091.This section determines the amount which a company is deemed to obtain if it disposes of an interest in an asset to a person who is the company’s associate. It is based on sections 781(1) and 783(4) and (5) of ICTA.
Section 681DJ: Apportionment of payments made and of sums obtained
1092.This section provides for apportionments to be made of payments made and sums obtained. It is based on section 783(6) to (8) of ICTA.
1093.Subsection (3) requires apportionments to be not only just but also reasonable. This is a minor change in the law. See Change 5 in Annex 1.
1094.Although section 783(6) and (8) of ICTA refer to vocations carried on in partnership (as well as to trades and professions carried on in partnership), it is considered that vocations cannot be carried on in partnership: see, for example, Change 4 in Annex 1 to the explanatory notes on CTA 2010. Accordingly, subsections (2), (4) and (5) do not refer to vocations.
Section 681DK: Manner of apportionment
1095.This section provides for apportionments to be made by the tribunal in certain circumstances. It is based on section 783(9) of ICTA.
Section 681DL: Associates
1096.This section defines “associates” for the purposes of this Chapter. It is based on section 783(10) and (11) of ICTA.
Section 681DM: Capital sum
1097.This section defines “capital sum” for the purposes of this Chapter. It is based on the definition of “capital sum” in section 785 of ICTA.
Section 681DN: Lease
1098.This section defines “lease” for the purposes of this Chapter. It is based on the definition of “lease” in section 785 of ICTA.
Section 681DO: Relevant asset
1099.This section defines “relevant asset” for the purposes of this Chapter. It is based on the definition of “asset” in section 785 of ICTA.
1100.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”.
Section 681DP: Relevant tax relief
1101.This section defines “relevant tax relief” for the purposes of this Chapter. It is based on section 781(4) of ICTA.
1102.Paragraph (a) omits references to a profession and to a vocation where the source legislation refers to the carrying on by a company of a trade, profession or vocation. This is a minor change in the law. See Change 13 in Annex 1.