Over the last few years, tax-based leasing in the UK has become increasingly difficult as a result of anti-avoidance provisions that have been introduced.
In response to each of these changes, the UK leasing industry has adapted and become more versatile. The industry is now facing yet another challenge – how to cope with the credit crunch.
Tax-based leasing is dependent upon leasing companies (which are usually subsidiaries of banks) obtaining and utilising the available tax breaks – capital allowances. The value of these tax breaks has been reduced over the last few years because of:
• The introduction of the long funding leasing rules;
• The reduction in the main rate of capital allowances and the corporation tax rate;
• The fact capital allowances are only valuable if the leasing company is a member of a group which has taxable profits which can be reduced by the capital allowances. At the moment, many banking groups are unlikely to have sufficient profits to utilise the tax breaks; and
• The current low interest rates. Obtaining capital allowances defers tax which would otherwise be due. This tax is paid later with the profits from the transaction (either the rents or from a sale of equipment). This, therefore, equates to a notional interest-free loan from the government. If interest rates are low, the value of this notional interest-free loan is less.
Our experience suggests that the leasing market is adapting to these challenges. Although banks are less willing to enter into new financings, there has been significant activity in refinancing existing transactions in recent months which has, to a large extent, been made more difficult as a result of the changes mentioned above.
Ultimately, the question of whether new transactions will be undertaken in any size and volume will depend on the availability of funding for the traditional players in the market, as well as the appetite of those part-nationalised banks to participate in tax enhanced transactions.
The author is a senior associate at the law firm Norton Rose