Chapter 3: Sales of lessors: leasing business carried on by a company alone
Overview
1172.This Chapter deals with cases where a leasing business is carried on by a company alone. Chapter 4 deals with cases where the business is carried on by one or more companies in partnership with others.
Section 382: Introduction to Chapter
1173.This section introduces Chapter 3. It is based on paragraph 1(1) and (2) of Schedule 10 to FA 2006.
Section 383: Income and matching expense in different accounting periods
1174.This section provides for an accounting period to end if there is a “qualifying change of ownership” in relation to a company within the charge to corporation tax carrying on a business of leasing plant or machinery otherwise than in partnership. It is based on paragraph 3 of Schedule 10 to FA 2006.
1175.On the day the accounting period ends the company is treated as receiving an amount of income which is brought into account for that accounting period for corporation tax purposes. See subsections (2) and (3).
1176.On the following day the company is treated as incurring an expense which is brought into account for a new accounting period for corporation tax purposes. See subsections (4) and (5).
Section 384: Amount of income and expense
1177.This section contains a signpost to the sections which contain the provisions for calculating the amount of the income to be brought into account in accordance with section 383(2) and (3) and provides that the amount of the expense to be brought into account in accordance with section 383(4) and (5) is the same as the amount of the income. It is based on paragraph 4 of Schedule 10 to FA 2006.
Section 385: No carry back of the expense
1178.This section prevents any loss which arises in the later accounting period which derives from the expense from being carried back against profits of any earlier accounting period under section 37(3)(b). It is based on paragraph 5 of Schedule 10 to FA 2006.
Section 386: Relief for expense otherwise giving rise to carried forward loss
1179.This section provides for the carrying forward of the expense to later accounting periods. It is based on paragraph 39 of Schedule 10 to FA 2006.
1180.If the company makes a loss in the accounting period which, in accordance with section 383(4)(b), begins on the day after the qualifying change of ownership, the loss derived from the expense treated as incurred under section 383(4)(a), which could otherwise only be carried forward and applied against the profits of the company’s leasing trade, is instead to be treated as an expense of the next accounting period and so available for group relief in that period.
1181.If the company continues to make losses, so much of the loss as derives from the expense can similarly be treated as an expense of subsequent accounting periods which start within five years of the qualifying change of ownership, unless there is a subsequent qualifying change of ownership.
1182.The amount of the loss derived from the expense is indexed to up-rate its value and preserve the symmetry between the value of the charge and the value of the relief. See subsection (2).
1183.Paragraph 39 of Schedule 10 to FA 2006 applies for the purposes of:
paragraph 3 of that Schedule, in a case where the company carries on the leasing business alone; and
paragraphs 23(4A) and 33 of that Schedule, in a case where the company carries on the business in partnership.
1184.It has been rewritten here for the purposes only of section 383. It has also been rewritten in two places in Chapter 4: in section 419 for the purposes of section 417(5) and in section 428 for the purposes of section 425. It is considered that it is helpful to paint the complete picture in each Chapter.
Section 387: “Business of leasing plant or machinery”
1185.This section, read with sections 388 to 391, sets out the conditions for determining whether on any day a companycarries on a “business of leasing plant or machinery” for the purposes of Chapter 3. It is based on paragraph 6 of Schedule 10 to FA 2006.
1186.Condition A in subsection (3) is that at least one half of “the relevant plant or machinery value” (see section 388) relates to “qualifying leased plant or machinery” (see subsection (7)).
Section 388: “Relevant plant or machinery value” for condition A in section 387
1187.This section sets out the method of calculating the relevant plant or machinery value on any day for the purposes of condition A in section 387(3). It is based on paragraph 7(1) to (3A) of Schedule 10 to FA 2006.
Section 389: Provision supplementing section 388
1188.This section contains further details of the basis of the calculation to be made in accordance with section 388. It is based on paragraph 7(4) to (9) of Schedule 10 to FA2006.
Section 390: Relevant plant or machinery value where relevant company lessee under long funding lease etc
1189.This section provides for adjustments to be made to the calculation in section 388 in certain circumstances. It is based on paragraph 7A of Schedule 10 to FA 2006.
1190.The circumstances are if the relevant company (see section 387(1)) is the lessee of the plant or machinery under a long funding finance lease or a long funding operating lease or is treated under section 67 of CAA as the owner of the plant or machinery under a hire purchase or similar contract.
Section 391: Relevant company’s income for condition B in section 387
1191.This section provides for the way in which income is to be calculated for the purposes of condition B in section 387(5). It is based on paragraph 8 of Schedule 10 to FA 2006.
Section 392: “Qualifying change of ownership”
1192.This section, read with sections 393 to 398, determines what constitutes a “qualifying change of ownership” for the purposes of the sales of lessors Chapters. It is based on paragraph 10 of Schedule 10 to FA 2006.
1193.A qualifying change of ownership is a “relevant change” in the relationship between the company carrying on a business of leasing plant or machinery (“A”) and its principal company. Section 393 determines what constitutes a “relevant change” where the relationship between A and its principal company is that of subsidiary and parent and section 394 deals with the case where the relationship is that of A and a member (or the parent company of a member) of a consortium, directly or indirectly, owning A.
1194.A qualifying change of ownership triggers A being treated as receiving income and incurring a matching expense not only for the purposes of section 383 in Chapter 3 where it carries on the business alone but also for the purposes of section 425 in Chapter 4 where it carries on the business in partnership.
Section 393: Qualifying 75% subsidiaries
1195.This section defines the relationship between a principal company and its subsidiary and determines what constitutes a “relevant change” in that relationship for the purposes of section 392. It is based on paragraph 11 of Schedule 10 to FA 2006.
1196.A company is only capable of being a principal company if it is not itself a75% subsidiary of another company (see subsections (1)(b), (3)(c) and (5)).
1197.A company carrying on a business of leasing plant or machinery (“A”) has another company (“B”) as its principal company if A is a qualifying 75% subsidiary, as defined in section 398, of B unless B is a qualifying 75% subsidiary of another company (see subsection (1)).
1198.If B is a 75% subsidiary of another company (“C”), then C is the principal company of A. But if C is a 75% subsidiary of another company (“D”), then D is the principal company of A. And so on.
1199.There is a “relevant change” in the relationship of A and the principal company if the relationship of A to the principal company ceases to be that of a qualifying 75% subsidiary or the chain of 75% qualifying subsidiaries is broken (see subsections (2), (4) and (6)).
Section 394: Consortium relationships
1200.This section defines the relationship between a company carrying on a business of leasing plant or machinery (“A”) and a principal company of A where A is owned, directly or indirectly, by a consortium and determines what constitutes a “relevant change” in that relationship for the purposes of section 392. It is based on paragraph 12 of Schedule 10 to FA 2006.
1201.This section applies if A is either owned by a consortium or is a qualifying 90% subsidiary of a company owned by the consortium (see subsections (1)(b) and (5)(b)).
1202.A company is only capable of being a principal company if it is not itself a75% subsidiary of another company (see subsections (1), (5) and (7)).
1203.Each company which is a member of the consortium (“E”) is a principal company of A unless it is a qualifying 75% subsidiary of another company (see subsection (1)).
1204.If E is a 75% subsidiary of another company (“F”), then F is the principal company of A. But if F is a 75% subsidiary of another company (“G”), then G is the principal company of A. And so on.
1205.There is a “relevant change” in the relationship of A and a principal company on any day if E’s “ownership proportion” is less at the end of the day than it was at the start of the day (see subsections (2), (6)(a) and (8)).
1206.E’s ownership proportion is measured by reference to the lowest of E’s interest in the share capital of A, A’s profits available for distribution and A’s assets available on a winding up (see subsection (3)), except where A is a qualifying 90% subsidiary of a company owned by the consortium. In that case it is E’s interest in the company of which A is a qualifying 90% subsidiary which is measured (see subsection (4)).
1207.The term “ownership proportion” has been substituted for the term “relevant fraction” in paragraph 12 of Schedule 10 to FA 2006. Similarly “proportion” has been used in place of “percentage”. This change in language follows the change in language used in rewriting section 403C of ICTA (amount of relief in consortium cases) in this Act (see sections 143 and 144).
1208.If a company other than E is the principal company of A in relation to E’s membership of the consortium, there is also a “relevant change” in the relationship of A and the principal company if E ceases to be a qualifying 75% subsidiary of the other company or the chain of 75% qualifying subsidiaries between the other company and E is broken (see subsections (6)(b) and (8)(b)).
Section 395: No qualifying change of ownership in the case of certain intra–group reorganisations
1209.This section ensures that there is no qualifying change of ownership of A in the case of certain group reorganisations. It is based on paragraph 13 of Schedule 10 to FA 2006.
1210.The group reorganisations in question are ones following which A and all other companies involved remain qualifying 75% subsidiaries of the same principal company as before the reorganisation.
Section 396: No qualifying change of ownership where principal company’s interest in consortium company unchanged
1211.This section ensures that there is no qualifying change in ownership in the case of a change in the composition of a consortium but there is no change in the interest of the principal company in the consortium company. It is based on paragraph 13A of Schedule 10 to FA 2006.
Section 397: Companies owned by consortiums and members of consortiums
1212.This section defines, for the purposes of the sales of lessors Chapters, what a company owned by a consortium means and who are the members of the consortium in relation to that company. It is based on paragraph 14 of Schedule 10 to FA 2006.
Section 398: “Qualifying 75% or 90% subsidiary” etc
1213.This section sets out the tests for determining whether, for the purposes of the sales of lessors Chapters, a company is a “qualifying 75% subsidiary” or a “qualifying90% subsidiary” of another company. It is based on paragraph 15 of Schedule 10 to FA 2006.
1214.It uses the same approach as is used for determining whether companies are in the same group for group relief purposes but with a modification. This is that companies without share capital, such as companies limited by guarantee, can be treated as subsidiaries if they fall to be treated as controlled by another company. Such companies are also accommodated by applying Chapter 6 of Part 5 of this Act to treat their members as if they were equity holders.
1215.The reference in paragraph 15(1)(b) of Schedule 10 to FA 2006 to the definition of control in section 840 of ICTA has not been rewritten.. The definition of control is rewritten in section 1124 and section 1176(2) applies that definition for the purposes of this Act unless otherwise indicated.
Section 399: The amount of the income: the basic amount
1216.This section gives the formula for determining the basic amount of income which is then to be adjusted in accordance with sections 404 to 406 to determine the amount of income for the purposes of section 383 on any day (“the relevant day”). It is based on paragraph 16 of Schedule 10 to FA 2006.
Section 400: “PM” in section 399
1217.This section, read together with sections 401 and 402, determines the amount which is “PM” in the formula in section 399 on the relevant day. It is based on paragraph 17(1) to (2B) of Schedule 10 to FA2006.
1218.Subsection (2)(d) is new. It provides a link to section 407 which requires plant or machinery to be ignored in certain circumstances.
Section 401: Provisions supplementing section 400
1219.This section contains further details of the basis of the calculation to be made in accordance with section 400 and gives the meaning of “the amounts shown in the appropriate balance sheet” in relation to the leasing company or an associated company. It is based on paragraph 17(3) to (8) of Schedule 10 to FA 2006.
Section 402: “PM” where relevant company lessee under long funding lease etc
1220.This section provides for adjustments to be made to the calculation in section 400 in certain circumstances. It is based on paragraph 17A of Schedule 10 to FA 2006.
1221.The circumstances are if the relevant company (see section 399(5)) is the lessee of the plant or machinery under a long funding finance lease or a long funding operating lease or is treated under section 67 of CAA as the owner of the plant or machinery under a hire purchase or similar contract.
Section 403: “TWDV” in section 399
1222.This section determines the amount which is “TWDV” in the formula in section 399 on the relevant day. It is based on paragraph 18 of Schedule 10 to FA2006.
1223.The TWDV amount is made up of the unrelieved qualifying expenditure in all single asset pools, class pools and the main pool. This is the amount at the start of the new accounting period following the relevant day but excludes any expenditure on the acquisition of plant or machinery on the relevant day except for plant or machinery acquired from associated companies. This adjustment ensures that amounts in respect of plant or machinery acquired from associated companies on the relevant day are included in both the PM and the TWDV amounts.
Section 404: Amount to be nil if basic amount negative
1224.This section ensures that, if the formula in section 399(3) produces a negative basic amount, the amount of the company’s income for the purposes of section 383 is nil. It is based on paragraph 19 of Schedule 10 to FA 2006.
Section 405: Adjustment to the basic amount: qualifying 75% subsidiaries
1225.This sectionprovides for an adjustment to the basic amount if the company ceases to be a 75% subsidiary and becomes instead a consortium company or a qualifying 90% subsidiary of a consortium company. It is based on paragraph 20 of Schedule 10 to FA 2006.
1226.In these circumstances the basic amount is reduced to reflect the change in the economic control of the lessor company. The amount of the income is limited to the “appropriate percentage” of the basic amount, that is the difference between 100 per cent and the “ownership percentage” after the qualifying change of ownership (see subsections (4) and (5)).
1227.The term “ownership percentage” has been substituted for the term “relevant fraction” in paragraph 20 of Schedule 10 to FA 2006 and corresponds to the use of the term “ownership proportion” in sections 394 and 406.
Section 406: Adjustment to the basic amount: consortium relationships
1228.This sectionprovides for an adjustment to the basic amount if the trigger event is a change in a consortium relationship. It is based on paragraph 21 of Schedule 10 to FA 2006.
1229.Subsections (2) and (3) apply if the qualifying change of ownership arises only because the ownership proportion (as defined in section 394(3) and (4)) at the end of the day is less than the ownership proportion at the start of the day (see section 394(2)). They provide that the amount of the income is limited to the “appropriate proportion” of the basic amount. The “appropriate proportion” is found by deducting the ownership proportion at the end of the day from the ownership proportion at the start of the day.
1230.Subsection (4) applies if the qualifying change of ownership does not arise solely because the ownership proportion at the end of the day is less than the ownership proportion at the start of the day (see for example section 394(6)(b) and(8)). It provides that the amount of the income is limited to the ownership proportion of the basic amount at the start of the day.
Section 407: Migration
1231.This section deals with situations where a company comes within the charge to corporation tax as a result of migration to the United Kingdom. It is based on paragraph 22 of Schedule 10 to FA 2006.
1232.The section prevents the migration of a company to the United Kingdom which is coupled with a qualifying change of ownership on the same day giving rise to an expense in its first accounting period in relation to plant or machinery which would be shown in a balance sheet of the company drawn up in accordance with GAAP immediately before the day of its migration.
Section 408: “Associated company”
1233.This section gives the meaning of “associated company” for the purposes of Chapter 3 only. It is based on paragraphs 7(10) and 9 of Schedule 10 to FA 2006.