Section 902: The conditions referred to in section 901(1)
2678.This section sets out the five conditions, A to E, all of which must be met if Chapter 2 is to apply to a specific lease. It is based on paragraph 3(1) to (5) of Schedule 12 to FA 1997.
2679.Condition A in subsections (2) to (4) requires the lease to fall to be treated under GAAP as a finance lease or loan.
2680.Condition B in subsection (5) requires a “major lump sum” which is not rent to be payable and for part of that sum to be treated under GAAP as return on investment in respect of the finance lease or loan.
2681.Condition C in subsection (6) is that not all of that part of the major lump sum would apart from Chapter 2 be brought into account for corporation tax purposes as the “normal rent” (see sections 896 and 903(3)) from the lease for accounting periods ending with “the relevant accounting period” (see section 903(1)).
2682.Condition D in subsection (7) is that for the period of account of the lessor in which “the relevant time” (see section 903(1)) falls or for an earlier period of account of the lessor, the “accountancy rental earnings” (see section 897) in respect of the lease exceed the normal rent for the period. The point of this condition is that, if a lessor is consistently being taxed on at least as much income as the commercial accounts show, then the terms of the lease are not ones which are designed to turn rental income into a capital receipt.
2683.Condition E in subsection (8) is that at the relevant time there exist such arrangements or circumstances as are mentioned in section 904.
2684.The arrangements and circumstances are set out in detail in section 904, but essentially there must be some likelihood that the lessee or a connected person of the lessee will buy out the lessor’s interest in the leased asset for a major lump sum.
2685.Condition E is intended to ensure that a lease does not come within Chapter 2 solely because there is a possibility that the lessor may obtain a major capital sum otherwise than from the lessee or a connected person. This might happen for example on the unplanned sale of the leased asset to a third party or on a claim under an insurance policy on the destruction of the asset.
