Leasing businesses should consider if a recent case
affects their view as to whether they are trading and if there are
any steps they can take to protect their position, says Norton
Rose’s Judy Harrison.
The first-tier tribunal in Samarkand Film
Partnership No.3 v HMRC (2011) has held that a film leasing
partnership was not trading.
The question of whether an
equipment lessor is trading is important because it allows the
lessor to surrender any tax losses it makes (for example, as a
result of claiming capital allowances, the tax relief available in
the UK for depreciation, on its equipment) and to receive
surrenders of losses from other companies in the lessor group to
reduce the lessor’s taxable profits.
This decision affects lessees as
well as lessors because of the risk-sharing provisions in the lease
Two Jersey partnerships were
created by Future Capital Partners. Future identified leasing
opportunities for the partnerships and negotiated the terms of the
Once the leasing arrangements had
been agreed in principle, individuals would borrow and invest in
the partnerships and the partnerships would acquire films and lease
The partnerships claimed tax relief
for the cost of buying a film.
The tribunal found that the partnerships were not trading.
They reached this conclusion by looking solely at the partnerships’
activities. The individual partners’ borrowing and tax reliefs were
Despite taking this approach, the
tribunal noted that if the taxpayer had been a company it would not
have ignored the borrowings and the availability of tax reliefs.
This distinction was unexpected, given that the partnerships were
not separate legal entities.
The tribunal considered that, on a
realistic view of the facts, the transaction could not be viewed as
a purchase of the film followed by its lease back to the seller.
Rather, the tribunal considered that the transaction was the
acquisition of a right to receive payments in instalments over time
in exchange for the payment of a lump sum.
It reached this conclusion on the
basis of the connection between the purchase and the leasing of the
film. Common with many equipment lessors, the partnerships would
not have acquired the films had they not been certain that they
would be able to lease them back.
Although not strictly necessary,
the tribunal considered in detail the arguments raised by HMRC. Of
particular interest in the leasing context, it held that:
- the expenditure on the films
had been incurred so long as that expenditure did not exceed the
market value of the films;
- the partnerships were not
carrying on their trades on a commercial basis, since the present
value of their income was less than their expenditure;
- the fees paid by the
partnerships for structuring the transaction, arranging the
partners’ finance, identifying the film and lessee and negotiating
the sale and leaseback were capital under general principles;
- the fees payable to future
were deductible in the accounting periods in which they were
recognised for accounting purposes unless those fees relate to
material services which were to be received in later
What this decision
It is very likely that the
Samarkand decision will be appealed and there is a parallel
judicial review claim.
In the meantime, leasing businesses
will need to consider whether Samarkand affects their view as to
whether they are trading and whether there are any steps they can
take to protect their position.
It may be that HMRC will seek to
rely on Samarkand to argue that corporate lessors are not trading,
despite the tribunal attempting to differentiate the position of a
company from that of a partnership comprised of individuals.
The possibility of HMRC raising
such an argument is perhaps surprising given that the courts have
accepted in many cases that leasing is an ordinary mercantile
transaction with the character of a trade. The risk of such a
challenge is greatest for those who are not habitually engaged in
Of wider importance is the view of
the tribunal that expenses may not be deductible in the accounting
period in which they are recognised for accounting purposes. No
explanation was given for this statement.
Given the importance of the issues
raised in Samarkand, it is hoped that the upper tribunal will have
the chance to consider the first-tier tribunal’s decision.
Judy Harrison is a senior
associate at law firm Norton Rose