Income Tax (Trading and Other Income) Act 2005

[F1[F2Lessors under long funding operating leases]U.K.

[F3148DLessor under long funding operating lease: periodic deductionU.K.

(1)This section applies if a person carrying on a trade is the lessor of any plant or machinery under a long funding operating lease for the whole or part of a period of account.

(2)A deduction is allowed in calculating the profits of the person for the period of account for income tax purposes.

(3)The amount of the deduction is so much of the expected gross reduction in value over the term of the lease as is attributable to the period of account.

(4)The expected gross reduction in value over the term of the lease is—

(a)the starting value of the plant or machinery, less

(b)the amount which at the commencement of the term of the lease is expected to be its residual value (or, if section 148DB applies, would have been expected to be that value had that value been estimated at that time).

(5)The expected gross reduction in value over the term of the lease that is attributable to the period of account is found by apportioning that reduction on a time basis according to the proportion of the term of the lease that falls in the period of account.

(6)For the meaning of “starting value”, see—

(a)section 148DA (“starting value”: general), and

(b)section 148DB (“starting value” where plant or machinery originally unqualifying).

(7)For the meaning of “residual value”, see section 148J(2).]

[F4148DA“Starting value”: generalU.K.

(1)This section is about the meaning of “starting value” in section 148D in relation to a long funding operating lease (“the section 148D lease”).

(2)But this section does not apply if the conditions in section 148DB(2) (“starting value” where plant or machinery originally unqualifying) are met.

(3)If the only use of the plant or machinery by the lessor has been the leasing of it under the section 148D lease as a qualifying activity, the starting value is the amount of the expenditure incurred by the lessor on the provision of the plant or machinery (“cost”).

(4)If subsection (3) does not apply, the starting value depends on the last previous use of the plant or machinery by the lessor.

(5)If that use was the leasing of it under another long funding operating lease as a qualifying activity, the starting value is the market value of the plant or machinery at the commencement of the term of the section 148D lease (“market value”).

(6)If that use was the leasing of it under a long funding finance lease as a qualifying activity, the starting value is the value at which the plant or machinery is recognised in the books or other finance records of the lessor at the commencement of the term of the section 148D lease.

(7)If that use was for the purposes of a qualifying activity other than leasing under a long funding lease, the starting value is the lower of cost and market value.

(8)For the meaning of “qualifying activity”, see section 148J(2).

148DB“Starting value” where plant or machinery originally unqualifyingU.K.

(1)This section applies if the conditions in subsection (2) are met in relation to a long funding operating lease to which section 148D applies.

(2)The conditions are that—

(a)the lessor owns the plant or machinery as a result of having incurred expenditure on its provision for purposes other than those of a qualifying activity,

(b)the plant or machinery is brought into use by the lessor for the purposes of a qualifying activity on or after 1 April 2006, and

(c)that qualifying activity is the leasing of the plant or machinery under the lease.

(3)For the purposes of section 148D the starting value is the lower of—

(a)first use market value, and

(b)first use amortised market value.

(4)“First use market value” means the market value of the plant or machinery at the time when it is first brought into use for the purposes of the qualifying activity.

(5)“First use amortised value” means the value that the plant or machinery would have at the time when it is first brought into use for the purposes of the qualifying activity on the assumptions in subsection (6).

(6)The assumptions are that—

(a)the cost of acquiring the plant or machinery had been written off on a straight line basis over its remaining useful economic life, and

(b)any further capital expenditure incurred had been written off on a straight line basis over so much of its remaining economic life as remains at the time when the expenditure is incurred.

(7)For the meaning of “qualifying activity”, “remaining useful economic life” and writing off on a straight line basis, see section 148J(2), section 148J(4) (and section 70YI of CAA 2001 as applied by that section) and section 148J(3) respectively.]

[F5148ELong funding operating lease: lessor's additional expenditureU.K.

(1)This section applies if in any period of account—

(a)a person carrying on a trade is the lessor of any plant or machinery under a long funding operating lease,

(b)the person incurs capital expenditure in relation to the plant or machinery (the “additional expenditure”), and

(c)the additional expenditure is not reflected in the market value of the plant or machinery at the commencement time (see subsection (7)).

(2)An additional deduction is allowed in calculating the profits of the person for income tax purposes for each period of account—

(a)which ends after the incurring of the additional expenditure, and

(b)in which the person is the lessor of the plant or machinery under the lease.

(3)The amount of the deduction is so much of the expected reduction in value of the additional expenditure (“the expected reduction”) as is attributable to the period of account.

(4)The expected reduction is the amount of the additional expenditure, less the remaining residual value of the plant or machinery resulting from that expenditure.

(5)For how to determine that remaining residual value, see—

(a)section 148EA (determination of remaining residual value resulting from lessor's first additional expenditure), and

(b)section 148EB (determination of remaining residual value resulting from lessor's further additional expenditure).

(6)The amount of the expected reduction attributable to the period of account is found by apportioning that reduction on a time basis according to the proportion of the term of the lease that falls in the period of account.

(7)In this section “the commencement time” means—

(a)except where section 148DB applies, the commencement of the term of the lease, and

(b)if that section applies, the time when the plant or machinery is first brought into use by the lessor for the purposes of the qualifying activity.]

[F6148EADetermination of remaining residual value resulting from lessor's first additional expenditureU.K.

(1)This section sets out how the remaining residual value of the plant or machinery resulting from the additional expenditure (“RRV”) is determined for the purposes of section 148E(4) if section 148E has not applied in relation to any previous additional expenditure incurred by the person in relation to the leased plant or machinery.

(2)RRV depends on whether—

(a)the amount (“ARV”) which is expected to be the residual value of the plant or machinery at the time when the additional expenditure is incurred, exceeds

(b)the amount (“CRV”) which at the commencement of the term of the lease is expected to be its residual value (or, if section 148DB applies, would have been expected to be that value had that value been estimated at that time).

(3)If ARV exceeds CRV, RRV is the part of the excess that is a result of the additional expenditure.

(4)Otherwise, RRV is nil.

(5)For the meaning of “residual value”, see section 148J(2).

148EBDetermination of remaining residual value resulting from lessor's further additional expenditureU.K.

(1)This section sets out how the remaining residual value of the plant or machinery resulting from the additional expenditure (“RRV”) is determined for the purposes of section 148E(4) if section 148E has applied in relation to previous additional expenditure incurred by the person in relation to the leased plant or machinery.

(2)RRV depends on whether—

(a)the amount which is expected to be the residual value of the plant or machinery at the time when the further additional expenditure is incurred (“FARV”), exceeds

(b)the sum of the amounts in subsection (3).

(3)Those amounts are—

(a)the amount which at the commencement of the term of the lease is expected to be the residual value of the plant or machinery (or, if section 148DB applies, would have been expected to be that value had that value been estimated at that time), and

(b)any amounts that were subtracted under section 148E(4) as the remaining residual value of the plant or machinery resulting from the previous additional expenditure.

(4)If FARV exceeds the sum of the amounts in subsection (3), RRV is the portion of the excess that is a result of the further additional expenditure.

(5)Otherwise, RRV is nil.

(6)For the meaning of “residual value”, see section 148J(2).]

[F7148FLessor under long funding operating lease: termination of leaseU.K.

(1)This section applies in calculating for income tax purposes the profits of a person carrying on a trade if the person is the lessor immediately before the termination of a long funding operating lease.

(2)If the termination amount exceeds the sum of the amounts in subsection (3), an amount equal to the excess is treated as income of the person attributable to the lease arising in the period of account in which it terminates.

(3)The amounts referred to in subsection (2) are—

(a)the total amounts paid to the lessee that are calculated by reference to the termination value,

(b)the excess relevant value for section 148D (see subsection (6)), and

(c)the excess expenditure for section 148E (see subsection (7)).

(4)If the sum of the amounts in subsection (3) exceeds the termination amount, the excess is treated as a revenue expense incurred by the person in connection with the lease in the period of account in which it terminates.

(5)No deduction is allowed in respect of any sums within subsection (3)(a).

(6)“The excess relevant value for section 148D” is the amount (if any) by which—

(a)the starting value of the plant or machinery for the purposes of section 148D(4) (lessor under long funding operating lease: periodic deduction), exceeds

(b)the total of the deductions allowable under section 148D for periods of account for the whole or part of which the person was the lessor.

(7)“The excess expenditure for section 148E” is the amount (if any) by which—

(a)the total of any amounts of capital expenditure incurred by the person which constitute additional expenditure in the case of the lease for the purposes of section 148E (long funding operating lease: lessor's additional expenditure), exceeds

(b)the total of any deductions allowable under section 148E for periods of account for the whole or part of which the person was the lessor.

(8)For the meaning of “termination amount” and “termination value”, see sections 70YG and 70YH of CAA 2001 (as applied by section 148J(4)).]]