Alistair Darling’s 2008 budget has delivered a softer blow to
lessors compared to those of recent years with the main change
being the predicted 5 per cent cut in capital allowances (CAs) for
plant and machinery.
The CA drop to 20 per cent is likely to make up for the
government shortfall caused by its decision to cut corporation tax
from 30 per cent to 28 per cent by April this year.
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No lessor, however, will reap the benefit of 100 per cent CAs –
known as Annual Investment Allowances – given to some small and
medium sized enterprises. “They have ignored our protests,” said
one lessor involved in government lobbying on this issue. Lessors
argued that if some of them had been granted increased CAs they
could have reduced rental payments due from SMEs.
Gordon Brown’s announcement last April, when he was chancellor,
that the WDA rate for plant within the ‘long life assets’
definition should rise from 6 to 10 per cent was implemented by
Darling on Wednesday.
Darling played the green card by offering tax relief for
business cars linked to their level of carbon dioxide emissions.
Writing down allowances for cars with CO2 emissions above 160g per
kilometre will total 10 per cent, while WDAs will double for
emissions below this figure.
The basic WDA rate for cars – which is subject to a pro rata
restriction above the £12,000 limit – falls from 25 to 20 per cent
under the existing system from April 2008. This is in line with the
rate for other types of vehicles and equipment. There will layer on
be a second round of change when the emissions based regime comes
in a year later.
The worst news for fleet leasing and contract hire, however, is
that the new structure from 2009 will retain an element of
discrimination against the leasing option. For leased cars on the
wrong side of the emissions break point, the lessee will be subject
to a tax disallowance of 15 per cent of the rental expenditure, on
top of the restricted WDA rate at 10 per cent for the
lessor.
Asset finance companies lending to small firms will be
celebrating the chancellor’s decision to increase small firm loans
guarantees, which sit alongside lease finance, by 60 per cent over
the next year.
In the Finance Act 2006 sale and leaseback deals were deemed to
be long funding leases – irrespective of their length – meaning
lessors involved in such transactions could not claim CAs. In
Wednesday’s budget this rule was applied to so-called ‘lease and
leasebacks’ where there is more than lease involved.
Pre Budget announcements in December included action against
deals structured with a capital premium being payable by an
equipment lessee in place of part of the periodic rentals, and
designed to be a tax-free receipt for the lessor. The new
legislation will ensure that these premiums, when received after
December 13, are taxed as income of the lessor. As from Budget day,
the rule will be extended to non-fixture plant leased together with
a property, but not to fixtures within a real estate lease. Only
plant and machinery leased on its own had been caught within the
December announcement.
The one completely new Budget day anti-avoidance announcement in
the leasing field brings a beefing-up of Section 785A Income and
Corporation Taxes Act 1988, which entered law in 2004.
This rule was designed to make sure that when an equipment
lessor sells the right to receive rentals to a third party, the
sale value is taxed as the lessor’s income. However, HM Revenue
& Customs has discovered that some financiers have created
structures that avoid payment of tax – such as when the seller and
buyer are linked together – which the budget has sought to
remove.
Further crackdowns on such tax dodges are planned for next
year’s Finance Bill, including taxing what HMRC currently describes
as “returns from investments that are economically equivalent to
interest”.
Paul Nash, a lease specialist tax partner at
PricewaterhouseCoopers, said the budget contained “a lot of
yesterday’s news”, while Tony Mitton, vice president of SMBC
Leasing (UK) Limited, described the budget as “nice and quiet”,
referring to its absence of comment on large ticket leasing.
