Changes to Schedule 10 and debt capital welcomed by lessors
Most equipment items acquired over the 12 months up to 31 March 2010 will qualify for a 40 percent first-year allowance (FYA). A qualifying taxpayer will therefore be able to write off twice as much of the cost in its current accounting year than it would with the previous 20 per cent annual writing down allowances (WDAs).
Assets acquired for leasing will, however, be excluded, along with long life assets (ie those eligible for 10 per cent WDAs) and business cars. This will affect all transactions where it is the lessor who claims CAs – which include most operating leases and all leases running for up to five years.
Where asset finance customers are themselves eligible for CAs, under hire purchase contracts and long funding leases (LFLs), they will be entitled to the FYA on the same basis as owner-users purchasing outright.
However, the temporary enhancement will not affect many small business CA claimants as the permanent annual investment allowance (AIA) already gives them a 100 per cent first year write-off on up to £50,000 (€55,650) worth of annual spending on equipment.
Tarun Mistry, director and head of leasing and asset finance at Grant Thornton, the accountants, said: “Excluding leasing from this kind of incentive seems quite unjustified. It will be a huge disappointment to the leasing industry, which lobbied strongly for such a stimulus.”
Also, some draft legislation, published with the pre-Budget report statement last November, was designed to block avoidance techniques based on LFLs.
On Budget day, HM Revenue & Customs (HMRC) announced in descriptive terms some proposals to amend those draft clauses, but without giving the detail of revised clauses.
It was also announced that “definitions of sale and leaseback in existing anti-avoidance legislation will be amended for consistency [with a provision in the draft clauses] and to achieve their objectives”.
Draft changes to schedule 10 – which works by applying a special tax charge to the selling group, and giving a corresponding relief to the buying group – included the application of its governing rules to complex transactions involving leasing companies trading in partnerships, or owned by consortia. Jonathan Vines, tax partner at KPMG, described this as a “minor tidying up”. Another amendment will extend the period during which tax losses derived from relief to the purchasing company under Schedule 10 can be surrendered to other companies in its group, and preserves the value of the relief by indexation through that period.
“This is welcome, and honours a commitment made by HMRC in earlier consultations,” said Vines.
There was also some welcome reassurance on possible leasing implications of a set of anti-avoidance rules targeted elsewhere.
Draft legislation published last December proposed a cap on worldwide debt subject to tax relief for interest payments, where highly leveraged foreign owned companies trade in the UK.
One provision of these draft clauses was designed to exclude from the debt cap the funding of finance leases and commercial lending business. This will now be extended to the funding of subsidiaries with operating lease portfolios.
George Tonks, partner of the Invigors consultancy, said: “The worldwide debt cap is an anti-avoidance measure.
“It was felt necessary in conjunction with the removal of additional UK tax charges on foreign profits, which is designed to make the UK much more attractive as a corporate HQ location.
“It was not meant to catch the funding of finance business, and the need for this latest change on operating leases was identified during consultations with HMRC.”