Chapter 4: Sales of lessors: leasing business carried on by a company in partnership
Overview
1234.This Chapter deals with cases where the company is carrying on a leasing business in partnership with others. It is necessary to provide not only for changes in the ownership of the company itself but also for changes in the partners’ interests in the partnership business, including the introduction and retirement of partners and changes in profit sharing ratios.
1235.This Chapter is based on Part 3 of Schedule 10 to FA 2006. The opportunity has been taken to set out in full certain provisions which in the source legislation operate by applying provisions of Part 2 of that Schedule with modifications. See sections 410 to 414 which restate in full the provisions of paragraphs 6 to 8 of Schedule 10 to FA 2006 as modified by paragraph 25 of that Schedule.
1236.Sections 417 to 424 deal with changes in the partnership and sections 425 to 429 deal with changes in the ownership of a company carrying on business in partnership.
Section 409: Introduction to Chapter
1237.This section introduces the Chapter and contains signposts to its principal provisions. It is based on paragraphs 23(1), 25(1) and (2) and 33(1) of Schedule 10 to FA 2006.
1238.In particular, it highlights the two events which may give rise to a charge and relief where a company carries on a leasing business in partnership.
Section 410: “Business of leasing plant or machinery”
1239.This section, read with sections 411 to 414, sets out the conditions for determining whether on any day a partnership carries on a “business of leasing plant or machinery” for the purposes of this Chapter. It is based on paragraph 25 of Schedule 10 to FA 2006.
1240.This section restates in full the provisions of paragraph 6 of Schedule 10 to FA2006 as applied by paragraph 25(1) and modified by paragraph 25(2) of that Schedule.
1241.Condition A in subsection (2) is that at least half of “the relevant plant or machinery value” (see section 411) relates to “qualifying leased plant or machinery”.
1242.Paragraph 25(2) of Schedule 10 to FA 2006 provides that:
“Any reference in [paragraphs 6 to 8] to the relevant company is to be read as a reference to the partnership.”
1243.Paragraph 6(5) of Schedule 10 to FA 2006 refers to “any company” and “the company”. Although paragraph 25(2) of Schedule 10 to FA 2006 does not explicitly modify those references, it is implicit that for the purposes of Part 3 of that Schedule those references must also be read as references to the partnership. This has been made explicit in subsection (6).
Section 411: “Relevant plant or machinery value” for condition A in section 410
1244.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 410(2). It is based on paragraph 25 of Schedule 10 to FA 2006.
1245.This section restates in full the provisions of paragraph 7(1) to (3A) of Schedule 10 to FA 2006 as applied by paragraph 25(1) and modified by paragraph 25(2) and (3) of that Schedule.
Section 412: Provision supplementing section 411
1246.This section contains further details of the basis of the calculation to be made in accordance with section 411. It is based on paragraph 25 of Schedule 10 to FA 2006.
1247.This section restates in full the provisions of paragraph 7(4) to (9) of Schedule 10 to FA 2006 as applied by paragraph 25(1) and modified by paragraph 25(2) of that Schedule.
1248.In giving effect to the implicit modifications made by paragraph 25(2) of Schedule 10 to FA 2006 to paragraph 7(4) and (7) of that Schedule, references have been included in subsections (1) and (4)both to the partnership and to any company, a company or the company. This is necessary as the question whether any plant or machinery is “relevant transferred plant or machinery” as regards any company mentioned in section 411(5) is determined by reference to the amounts which would be shown in the appropriate balance sheet of that company (seesection 411(4)).
Section 413: Relevant plant or machinery value where partnership lessee under long funding lease etc
1249.This section provides for adjustments to be made to the calculation in section 411 in certain circumstances. It is based on paragraph 25 of Schedule 10 to FA2006.
1250.This section restates in full the provisions of paragraph 7A of Schedule 10 to FA 2006 as applied by paragraph 25(1) and modified by paragraph 25(2) and (3) of that Schedule.
1251.The circumstances are if the partnership 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 414: Partnership’s income for condition B in section 410
1252.This section provides for the way in which the partnership’s income is to be calculated for the purposes of condition B in section 410(4). It is based on paragraph 25 of Schedule 10 to FA 2006.
1253.This section restates in full the provisions of paragraph 8 of Schedule 10 to FA2006 as applied by paragraph 25(1) and modified by paragraph 25(2) of that Schedule.
Section 415: “Qualifying change” in company’s interest in a business
1254.This section defines a “qualifying change” in a company’s interest in a business by reference to a reduction in its “percentage share” in the profits or loss of the business. It is based on paragraph 27 of Schedule 10 to FA 2006.
Section 416: Determining the percentage share in the profits or loss of business
1255.This section provides that a company’s “percentage share” in the profits or loss of the business is to be determined on a just and reasonable basis. It is based on paragraph 28 of Schedule 10 to FA 2006.
Section 417: Partner company’s income and other companies’ matching expense
1256.This section provides for the consequences of a “qualifying change” on any day in a company’s interest in a leasing business carried on by it in partnership. It is based on paragraph 23 of Schedule 10 to FA 2006.
1257.A “qualifying change” is defined in section 415 and occurs if there is a reduction in the company’s interest in the business.
1258.On the day of the qualifying change, the company is treated as receiving an amount of income and the other companies carrying on the business are treated as incurring an expense. In this case, there is no ending of an accounting period such as in section 383. The income and expense are recognised in the accounting period of the company which relates to the day of the qualifying change.
1259.If a single company is carrying on the business alone after the qualifying change, subsection (5) provides that the expense is treated as incurred by it at a time when it is carrying the business alone and is allowed as a deduction in calculating the profits of the business for the accounting period in which it is treated as incurred.
Section 418: Amount of income and expense
1260.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 417(2)(a) and (3) and to the section determining the amount of the expense to be brought into account in accordance with section 417(2)(b) and (4) or (5). It is based on paragraph 24 of Schedule 10 to FA 2006.
Section 419: Relief for expense otherwise giving rise to carried forward loss
1261.This section applies if, as the result of a qualifying change in a partner company’s interest in the partnership business, a single company succeeds to the partnership business and provides for the carrying forward of the expense incurred by the successor company to later accounting periods. It is based on paragraph 39 of Schedule 10 to FA 2006.
1262.If the successor company makes a loss in the accounting period in which it begins to carry on the business alone, the loss derived from the expense treated as incurred under section 417(5)(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.
1263.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 the period of five years beginning with the day on which the qualifying change in the partner company’s interest in the business occurs, unless there is a subsequent qualifying change of ownership.
1264.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).
1265.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.
1266.It has been rewritten here for the purposes only of section 417(5). It has also been rewritten in section 386 for the purposes of section 383 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 420: Exception: companies carrying on business ceasing to share in its profits
1267.This section disapplies section 417 subject to certain conditions where all the companies carrying on the business in partnership cease to be interested in the business on the same day. It is based on paragraph 23A of Schedule 10 to FA 2006.
Section 421: The amount of the income: the basic amount
1268.This section gives the formula (PM – TWDV) for determining the basic amount of income of the partnership which is then to be adjusted in accordance with section 422 or 423 to determine the amount of income of the company for the purposes of section 417 on any day (“the relevant day”). It is based on paragraph 29 of Schedule 10 to FA 2006.
1269.Subsection (4) applies the definition of PM in section 400 with modifications.
1270.Subsection (5) determines the amount which is TWDV.
1271.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 that would be carried forward assuming that a chargeable period ends on the relevant day and a new one begins on the following day (see subsection (6)(a)).
1272.But any expenditure on the acquisition of plant or machinery on the relevant day is excluded, except for plant or machinery acquired from qualifying companies (see subsection (6)(b)). This adjustment ensures that amounts in respect of plant or machinery acquired from qualifying companies (as defined in subsection (7)) on the relevant day are included in both the PM and the TWDV amounts.
Section 422: Amount to be nil if basic amount negative
1273.This section ensures that, if the formula in section 421(3) produces a negative basic amount, the amount of the company’s income for the purposes of section 417 is nil. It is based on paragraph 30 of Schedule 10 to FA 2006.
Section 423: Adjustment to the basic amount
1274.This section limits the amount of the company’s income for the purposes of section 417 to a percentage of the basic amount. It is based on paragraph 31 of Schedule 10 to FA 2006.
1275.The percentage of the basic amount is found by deducting the company’s percentage share in the profits or loss of the partnership at the end of the day from its percentage share at the beginning of the day.
Section 424: The amount of expense
1276.This section determines the amount of expense treated as incurred by a company in accordance with section 417(2)(b) as the result of a qualifying change in the partner company’s interest in the business on any day. It is based on paragraph 32 of Schedule 10 to FA 2006.
1277.Except where a single company is carrying on the business at the end of the day, the amount of the expense is determined by reference to any increase of the company’s percentage interest in the profits or loss of the partnership which is attributable to the qualifying change in the interest in the business of the partner company (see subsections (2) and (3)).
1278.Where a single company is carrying on the business at the end of the day, the amount of the expense is equal to the amount of the income (see subsection (4)).
Section 425: Partner company’s income and matching expense in different accounting periods
1279.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 in partnership. It is based on paragraph 33 of Schedule 10 to FA 2006.
1280.This section is the equivalent of section 383 which applies where the company is carrying on the business alone. “Qualifying change of ownership” has the same meaning in this section as it does in section 383 (see sections 392 to 398).
1281.On the day the accounting period ends the company is treated as receiving an amount of income which is brought into account in calculating the profits of the company’s “notional business” for that accounting period for corporation tax purposes. See subsections (2) and (3).
1282.On the following day the company is treated as incurring an expense which is brought into account in calculating the profits of the company’s “notional business” for a new accounting period for corporation tax purposes. See subsections (4) and (5).
Section 426: Amount of income and expense
1283.This section contains a signpost to the section which contains the provisions for calculating the amount of the income to be brought into account in accordance with section 425(2) and (3) and provides that the amount of the expense to be brought into account in accordance with section 425(4) and (5) is the same as the amount of the income. It is based on paragraph 34 of Schedule 10 to FA 2006.
Section 427: No carry back of the expense
1284.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 35 of Schedule 10 to FA 2006.
Section 428: Relief for expense otherwise giving rise to carried forward loss
1285.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.
1286.If the company makes a loss in the accounting period which, in accordance with section 425(4)(b), begins on the day after the qualifying change of ownership, the loss derived from the expense treated as incurred under section 425(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.
1287.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.
1288.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).
1289.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.
1290.It has been rewritten here for the purposes only of section 425. It has also been rewritten in section 386 for the purposes of section 383 and in section 419 for the purposes of section 417(5). It is considered that it is helpful to paint the complete picture in each Chapter.
Section 429: The amount of the income
1291.This section sets out the rules for determining the amount of the company’s income for the purposes of section 425 on any day. It is based on paragraph 36 of Schedule 10 to FA 2006.
1292.The rules adopt concepts from Chapters 3 and 4 for this purpose. The basic amount is found in accordance with section 421 in Chapter 4 and is then adjusted in accordance with sections 404 to 406 in Chapter 3. The “appropriate percentage” of the adjusted amount is then taken.
1293.Subsection (5) ensures that, if on the same day there is also a qualifying change in the company’s interest in the business carried on by the partnership, the percentage share in relation to which the amount of income under section 417 is calculated is not also taken into account in calculating the income under section 425.
Section 430: “Associated company”
1294.This section gives the meaning of “associated company” for the purposes of Chapter 4 only. It is based on paragraph 26 of Schedule 10 to FA 2006.
1295.This section is substantially similar to section 408 which gives the meaning of “associated company” for the purposes of Chapter 3 but includes additional provisions in subsection (5) for the case where the company is a consortium company and there is a qualifying change in its interest in the business carried on by it in partnership.
Section 431: “Profits” and “loss”
1296.This section provides that in calculating the amount of income and expense for the purposes of this Chapter a company’s percentage share does not include its share in any chargeable gains or losses. It is based on paragraph 37 of Schedule 10 to FA2006.
1297.In the case of some partnerships, different profit sharing ratios are agreed for income profits and losses and capital profits and losses. This provision ensures certainty in such cases by looking only at the profit sharing ratios for income profits and losses.
