Glitches in the capital allowance
regime for both lessors and lessee have been largely ironed out in
last month’s pre-Budget report.Lessors face a change in capital
allowances in cases where they have changed the use of assets.
This will be particularly relevant in
the context of a leased asset that is converted into a long funding
finance lease within the meaning of the Finance Act 2006.
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Under the rules, the capital
allowances will be set not at the sale value of the equipment, but
the value of the equipment or the capital value of the rentals,
whichever is higher.
This change is unlikely to hit many
leasing companies, according to Michael Ratcliff, tax partner at
Denton Wilde Sapte.
“Equipment initially acquired for
leasing on a long funding lease will not have qualified for CAs in
the first place, so disposal values will not arise. It could only
arise where the lessor’s initial purchase was for a different
purpose,” he said.
The government has also clamped down
on the amount of capital allowances that lessees can receive. Under
the old rules, lessees that carried out a sale and leaseback could
base the amount of capital allowances they receive on the equipment
sale price. Under the new rules, the CA level is based on the tax
written down value of the assets.
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By GlobalDataCorresponding rules will apply to
“sale and hire purchase (HP) back” in the same way as for sale and
lease-back under the long funding regime.
The rules regarding the amount lessees
accounted for at the disposal of assets – for the purpose of
determining capital allowances amount – at the end of long funding
leases have also been updated. Previously it was set according to
the balance of minimum lease payments, but this has now been
reformulated. Ratcliffe said the original rules in the Finance Act
2006 were “badly drafted”, but that the new rules now “make
sense”.
Also, film lessors under new long
funding leases are now subject to tax on the whole rental income,
while still being barred from claiming CAs.
HMRC said that this will close an
opportunity for film lessors under old leases pre-dating FA 2006,
in which they could claim tax relief on the full cost of production
under Finance (No. 2) Act 1992, and avoid tax on the interest
element of the lease by terminating the original lease and
replacing it with a LFL.
HMRC has released draft clauses for
all the new legislation. It will be enacted through the 2009
Finance Bill, but backdated to the date of announcement.
