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Finance Act 2012

Background Note

17.The long funding lease rules were introduced into CAA, and other relevant parts of the Tax Acts, by Schedule 8 of Finance Act 2006.

18.These rules provide that where the relevant conditions are satisfied, the lessee, rather than the lessor, is entitled to claim capital allowances for expenditure on the plant or machinery which is the subject of the long funding lease.

19.Sections 70B and 70C of CAA provide the rules for how the lessee’s qualifying expenditure for capital allowances at the commencement of, respectively, a long funding operating lease or a long funding finance lease is to be calculated. At commencement of the lease this is necessarily an estimate because the lessee actually incurs the expenditure over the course of the lease

20.The rules in section 70E of CAA deal with disposal events and disposal values. For all long funding leases a formula is used though the definition of one part of the formula, “QA” (Qualifying Amount), differs depending upon whether the lease in question is a finance or operating lease.

21.The purpose of the formula is to adjust the amount of capital allowances available to the lessee, which were initially based on estimated expenditure, to match the lessee’s actual expenditure less any rebates received (i.e. net expenditure).

22.These amendments address disclosed avoidance schemes that involve arrangements which include transactions, the claimed effect of which is that an amount is received by the lessee in connection with a long funding lease but which is not taken into account in the prescribed formula for disposal value. The tax effect claimed is that capital allowances are due to the lessee in excess of the net expenditure (not otherwise relieved) by the lessee on the leased asset.

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