Pre-Budget Report
The following was issued by HM Treasury as part of Chancellor,
Alistair Darling’s Pre-Budget Report today
Go deeper with GlobalData
Access deeper industry intelligence
Experience unmatched clarity with a single platform that combines unique data, AI, and human expertise.
A full report will appear in the next issue of Leasing
Life
SALE OF LESSORS: COMPANIES IN
PARTNERSHIP
Who is likely to be affected?
1. Companies carrying on the business of leasing plant or machinery
in partnership.
General description of the measure
2. This measure amends Schedule 10 to Finance Act (FA) 2006 to
avoid an unintended and unfair tax liability where a single company
acquires all of the business of leasing plant or machinery carried
out by a partnership.
Operative date
3. This measure will have effect on and after 5 December 2005, the
date from which Schedule 10 has effect.
Current law and proposed revisions
4. Schedule 10 to FA 2006 counters avoidance involving the sale of
companies leasing plant or machinery. In broad terms it does this
by bringing into charge an amount of income that is taxed on the
seller’s group and giving an equal amount of relief to the
purchaser’s group. Where the business is carried on by companies in
partnership and there is a change in a partner’s interest in the
business the legislation brings into charge an amount of income for
the selling partner and a relief for the acquiring partner.
5. When a leasing business carried on by companies in partnership
is sold to a single company, Schedule 10 brings an amount of income
into charge for the partners. However, it does not give matching
relief to the purchaser.
6. Legislation will be introduced in Finance Bill 2008 to ensure
that relief is available to the purchasing company.
7. Draft legislation has been published today on the HM Revenue and
Customs website.
Further advice
LEASED PLANT AND MACHINERY:
ANTI-AVOIDANCE
Who is likely to be affected?
1. Businesses leasing plant or machinery.
General description of the measure
2. This measure will counter avoidance involving the sale and
finance leaseback of existing plant or machinery by removing a rule
that allows businesses to dispose of plant or machinery free of tax
and by bringing the finance leaseback within the scope of the rules
for taxing long funding leases.
3. It will also counter attempts to exploit the rules for taxing
long funding leases to create a tax loss where there is little or
no commercial loss by bringing the measure of taxable profits into
line with commercial profits.
Operative date
4. The measure will have effect for transactions entered into on or
after 9 October 2007.
Current law and proposed revisions
Sale and finance leaseback
5. Rules were introduced in 1997 to counter tax avoidance involving
the sale and finance leaseback of plant or machinery by entities
that were not liable to tax. These arrangements relied on the
purchaser being able to claim capital allowances on the plant or
machinery it leased back to the original owner.
6. These rules allow most of the sales proceeds to be received
untaxed but restricted the capital allowances that could be claimed
by the purchaser. Abuse of these rules was partially countered in
2004 but new arrangements continue to exploit the 1997 rules.
7. Legislation will be introduced in Finance Bill 2008 to remove
the 1997 legislation that is being exploited. As a consequence,
most of the rules introduced in 2004 will be removed as
well.
8. In order to ensure that the avoidance countered in 1997 does
not return, leases in sale and finance leaseback arrangements will
be brought within the scope of the long funding lease rules. This
aspect of the measure will not have effect if the plant or
machinery is less than four months old when sold.
Long funding leases
9. A lessor under a long funding lease is not entitled to claim
capital allowances on the cost of the leased asset but, to
compensate, it is only taxed on a small proportion of the lease
rental income. Avoidance schemes have been developed that purport
to establish an alternative deduction for the cost of the leased
asset. If these arrangements are effective they will generate a tax
loss approximately equivalent to the cost of the leased asset, even
though there is no commercial loss.
10. Legislation will be introduced in Finance Bill 2008 to put
beyond doubt that where a deduction is available for the cost of
the leased asset the rules restricting the amount of taxable income
do not apply. This will prevent the lessor generating artificial
losses.
11. Legislation will also be introduced in Finance Bill 2008 to
counter alternative attempts to avoid tax by using the long funding
lease rules to create a substantial tax loss where there is little
or no commercial loss.
Draft legislation
12. Further details of this measure, including draft legislation
and draft explanatory notes, are contained in a Technical Note
published today on the HM Revenue & Customs website.
