Over the years, the UK leasing industry has been affected by changes to the tax rules and judgments handed down by the courts. The government is consulting on introducing a new general anti-abuse rule (GAAR) in Finance Bill 2013.
The proposed GAAR will only apply to transactions which would otherwise produce an ‘abusive’ UK tax advantage. The aim of the GAAR is to counteract these tax advantages. It is worth noting that the GAAR may apply to pre-existing transactions, so even though the GAAR has not been finalised, UK-based lessors and lessees should consider its potential impact on any new transactions they enter into.
Traditionally, UK lessors have often structured leasing finance transactions to ensure that the lessor obtains capital allowances, which is the type of tax relief available for depreciation in the UK.
This has been particularly important where lessee groups have not been sufficiently profitable to utilise capital allowances. The capital allowances regime contains a number of anti-avoidance rules targeted at specific transactions. It also contains a number of targeted anti-avoidance rules (for example, where an asset is sold by a business and leased back, capital allowances are restricted if avoidance is a main purpose of the transaction – see Leasing Life 224, May 2012). It is not expected that the introduction of a GAAR would be used as an opportunity to simplify the rules.
In addition, Her Majesty’s Revenue & Customs has challenged the tax treatment of certain leasing transactions before the courts (for example, a recent case considered whether a leasing partnership was trading –see Leasing Life 225, June 2012). A GAAR is unlikely to reduce the number of cases before the courts but would add an additional layer of complexity to any dispute.
The GAAR will only apply to abusive tax arrangements. This is defined as any arrangement which has a main purpose of obtaining a UK tax advantage which cannot reasonably be regarded as a reasonable course of action.
In determining whether a transaction is an abusive one, it will be necessary to consider the background to the relevant tax legislation; so for example, any principles on which the legislation is based and any policy objectives. When a court considers the application of the GAAR, it will be required to consider any guidance (which will be approved by an advisory panel consisting of employees of HMRC and people with other relevant experience) and any view the advisory panel has expressed in respect of the transaction in issue. The burden of proving that the GAAR should apply lies with HMRC.
The draft consultation document contains a number of examples of cases which HMRC have lost before the courts which the GAAR is intended to apply to. None of these examples provide much assistance in illustrating how a GAAR would apply to a leasing transaction. Before the GAAR is introduced, detailed guidance will be published.
Our view is that the decision to lease an asset (for example under a five-year finance lease) rather than to borrow to buy an asset, should not normally be an abusive tax arrangement, even where the lessee would not be able to use the capital allowances resulting from the asset itself. We also expect that structuring a finance lease so that it has a term of five years (rather than say, a term of five years and one day) to ensure that it is not a long funding lease should not typically be caught by the GAAR. The position for more structured leasing arrangements will need to be considered carefully on a case by case basis.
There is still a significant amount of work to be done for Finance Bill 2013 to contain a GAAR. The current consultation runs until 14 September 2012. Arguably, the most important issue to be resolved before a GAAR is introduced is how to define what constitutes an abusive transaction.
The answer will be dealt with to a large extent in the guidance. Before the guidance can be drafted, the advisory panel (who approve the guidance) must be appointed. The consultation document contains scant information about the types of person who will be members of the advisory panel. Given the importance of defining what constitutes an abusive arrangement correctly, it is hoped that once the advisory panel is appointed and guidance is produced, there will be a further consultation as to the content of the guidance.
Once the guidance is published the leasing industry will have a clearer idea of the impact of a GAAR. It is hoped that this guidance will provide reassurance that common commercial leasing transactions are not caught. This would be in line with the principles behind the introduction of a GAAR – in that it is not intended to catch normal commercial arrangements.
Judy Harrison is a senior associate with law firm Norton Rose