1112.This Chapter rewrites Chapter 5A (special rules for long funding leases of plant or machinery) inserted into Part 12 of ICTA by Part 2 of Schedule 8 to FA 2006.
1113.Schedule 8 to FA 2006 reformed the way in which certain finance leases of plant or machinery, and operating leases of plant or machinery akin to such finance leases, are taxed. In broad terms it does so by amending ICTA, CAA and ITTOIA:
to move entitlement to capital allowances in relation to the plant or machinery under such a lease – a “long funding lease” – from lessor to lessee; and
to tax the lessor and lessee in relation to the financing of the plant or machinery through such a lease in much the same way as lender and borrower would be taxed in relation to financing the plant or machinery through a loan.
1114.This section sets out the structure of the Chapter and contains a signpost to section 381 for the meaning of terms used in the Chapter. It is new.
1115.The Chapter is arranged so that it deals first with the calculation of the taxable profits of the lessor and then with the calculation of the taxable profits of the lessee. In each case it deals with the lessor or lessee first as party to a long funding finance lease and then as party to a long funding operating lease.
1116.The terms “long funding lease” and “long funding finance lease” take their meaning from Chapter 6A of Part 2 of CAA and “long funding operating lease” is defined by reference to those terms. See section 381(2).
1117.It is an integral part of the definition of “long funding lease” in CAA that the subject matter of the lease is plant or machinery (see sections 70G, 70J and 70K of CAA).
1118.This section determines the taxable income of the lessor from a long funding finance lease. It is based on section 502B of ICTA.
1119.The taxable income is the amount of rental earnings. The calculation of rental earnings follows GAAP. The rental earnings is the amount that in accordance with that practice is to be treated as gross return on investment or, in a case where in accordance with that practice the lease is to be treated as a loan, as interest.
1120.Section 502B(3) of ICTA includes in relation to the lease the words “where it meets the finance lease test”. Those words are otiose and have been omitted from subsection (3).
1121.Section 502B(4) of ICTA refers to the lease being “treated as a loan in the accounts in question”. There is no other reference to “accounts” in section 502B and those words have been changed in subsection (4) to read “treated as a loan for the period of account” linking back to the “period of account” mentioned in subsection (1).
1122.This section treats as taxable income or a revenue expense certain profits or losses in connection with a long funding finance lease which would not apart from this section be brought into account for corporation tax purposes. It is based on section 502C of ICTA.
1123.The profits and losses to be brought into account are those (whether of an income or capital nature) which in accordance with GAAP fall to be recognised for accounting purposes.
1124.This section prohibits a deduction by a lessor for a payment made in respect of the termination of a long funding finance lease if the amount of the payment is calculated by reference to “termination value”. It is based on section 502D of ICTA.
1125.On termination of a finance lease of an asset, the lessor often makes a payment to the lessee, commonly referred to as a rebate of rentals. This payment principally represents partial reimbursement of payments made by the lessee in respect of the capital value of the asset, unencumbered possession of which has reverted to the lessor as a result of the termination. This section prevents such a payment from being deducted by the lessor for corporation tax purposes. But the section does not prevent the deduction of a payment to the extent it is in respect of a sum included in computing rental earnings (see subsection (3)).
1126.Subsection (4) is new and provides a signpost to the definition of “termination value”.
1127.This section compensates a lessor under a long funding operating lease for the fact that capital allowances in relation to the leased plant or machinery are not available to it. It is based on section 502E(1) to (3) and (6) to (9) of ICTA.
1128.In the case of an operating lease, the gross rentals are to be brought into account for corporation tax purposes. This achieved the correct result prior to FA2006, as the lessor was entitled to capital allowances which over the term of the lease balanced the amount brought into charge that represented payment of the capital value of the leased plant or machinery.
1129.This section replaces the role of capital allowances. It allows deductions in calculating the profits of the lessor for corporation tax purposes, which over the term of the lease equate in total to the expected reduction in value of the plant or machinery over the term.
1130.The words “had that value been estimated at that time” have been added in subsection (4)(b) to explain the reasoning behind the use of the words “would have been expected” in section 502E(6)(b) of ICTA.
1131.This section, together with sections 364 and 365, presents the calculation required by section 502E of ICTA in a substantially different way. The provision has been restructured to improve the accessibility of the legislation for lessor companies and their advisers, in particular by splitting out the different basis of calculation required where the lessor incurred expenditure on the provision of the plant or machinery otherwise than for a qualifying purpose.
1132.This section determines the “starting value” of the plant or machinery for the purposes of the calculation required by section 363 except in the circumstances where section 365 applies. It is based on section 502E(4) and (5) of ICTA.
1133.This section determines the “starting value” of the plant or machinery for the purposes of the calculation required by section 363 in a case where, before the long funding operating lease commenced, the lessor incurred expenditure on the plant or machinery otherwise than for the purposes of a qualifying activity within the meaning of Part 2 of CAA. It is based on section 502E(4) and (5) of ICTA.
1134.This section provides for an additional deduction by a lessor under a long funding operating lease if the lessor incurs additional expenditure in relation to the leased plant or machinery. It is based on section 502F(1) to (4) and (7) to (11) of ICTA.
1135.This section, together with sections 367 and 368, presents the calculation required by section 502F of ICTA in a substantially different way. The provision has been restructured to improve the accessibility of the legislation for lessor companies and their advisers, in particular by splitting out the different basis of calculation required where the lessor has previously incurred additional expenditure.
1136.This section determines the amount of the remaining residual value of the plant or machinery for the purposes of section 366 as a result of the first occasion on which the lessor incurs additional expenditure. It is based on section 502F(5) and (6) of ICTA.
1137.The words “(or, if section 365 applies, would have been expected to be that value had that value been estimated at that time)” in subsection (2)(b) reflect the wording of section 363(4)(b). See the commentary on section 363.
1138.This section determines the amount of the remaining residual value of the plant or machinery for the purposes of section 366 as a result of the second and subsequent occasions on which the lessor incurs additional expenditure. It is based on section 502F(5) and (6) of ICTA.
1139.The words “(or, if section 365 applies, would have been expected to be that value had that value been estimated at that time)” in subsection (3)(a) reflect the wording of section 363(4)(b). See the commentary on section 363.
1140.This section provides for the lessor to be treated as receiving income or, depending on the circumstances, incurring a revenue expense for corporation tax purposes on the termination of a long funding operating lease. It is based on section 502G of ICTA.
1141.Whether or not income is treated as being received or a revenue expense as being incurred is determined by reference to “the termination amount” and the amounts mentioned in subsection (3)(a) to (c), but the amounts mentioned in subsection (3)(a) (amounts paid to the lessee by reference to the termination value) may not themselves be deducted (see subsection (5)).
1142.The presentation of the calculation required by section 502G of ICTA has been substantially restructured to improve the accessibility of the legislation for lessor companies and their advisers.
1143.This section disapplies sections 360 to 369 if, apart from those sections, any part of the lessor’s expenditure on the acquisition of the plant or machinery is allowable as a deduction for corporation tax purposes as a result of the plant or machinery forming part of the lessor’s trading stock. It is based on section 502GA(1) to (3) of ICTA.
1144.This section applies if sections 360 to 369 previously applied, but the condition in section 370(2) is subsequently met. It is based on section 502GA(4) and (5) of ICTA.
1145.The section provides for just and reasonable assessments and adjustments to assessments to be made in relation both to the amounts taken into account in accordance with sections 360 to 369 and to those to be taken into account in accordance with section 370.
1146.This section disapplies sections 360 to 369 in the case of a company which as lessor grants a long funding lease (lease B) of plant or machinery in which its interest is that of a lessee under a lease (lease A) which is not a long funding lease. It is based on section 502GB of ICTA.
1147.Section 70H of CAA provides that a lease otherwise capable of being a long funding lease is not a long funding lease as regards the lessee unless the lessee has made a tax return treating the lessee as taxable in relation to the lease in accordance with Chapter 5A of Part 12 of ICTA. Subsection (3)(a) ensures that, if a tax return is made validly treating lease A as being a long funding lease after lease B has been entered into, this section is treated as never having applied to lease B. Subsection (3)(b) ensures that this section does apply to lease B, if a tax return which treated lease A as being a long funding lease is subsequently amended so as not to treat it as such a lease.
1148.This section disapplies sections 360 to 369 where three conditions are met. It is based on section 502GC(1) to (3) and (5) of ICTA.
1149.The three conditions counter arrangements involving a long funding lease which are intended to create tax profits which are substantially less than, or tax losses which are substantially greater than, the profits or losses arising from the arrangements as shown in the lessor company’s accounts. The section may also apply where there is a tax loss and an accounting profit.
1150.This section provides definitions and interpretation for the purposes of section 373. It is based on section 502GC(2), (4) and (6) to (8) of ICTA.
1151.This section applies if sections 360 to 369 have previously applied, but the conditions in section 373 are subsequently met. It is based on section 502GC(9) and(10) of ICTA.
1152.The section provides for just and reasonable assessments and adjustments to assessments to be made in relation both to the amounts taken into account in accordance with sections 360 to 369 and to those to be taken into account in accordance with section 373.
1153.This section disapplies sections 360 to 369 in the case of a long funding lease of a film. It is based on section 502GD of ICTA.
1154.This section, the first of those relating to lessees, limits the amount which a lessee of plant or machinery under a long funding finance lease may deduct in calculating its profits for corporation tax purposes. It is based on section 502I of ICTA.
1155.The amount which may be deducted is limited to the amounts which in accordance with GAAP fall to be shown in the lessee’s accounts as finance charges in respect of the lease (see subsections (2) and(3)).
1156.In certain circumstances in accordance with GAAP a long funding finance lease is treated as a loan for accounting purposes. This section applies as if such a lease were treated as a finance lease (see subsection (4)).
1157.This section avoids double taxation by excluding from the lessee’s calculation of its profits for corporation tax purposes any sum received by the lessee in relation to a long funding finance lease which is calculated by reference to “termination value”. It is based on section 502J of ICTA.
1158.Such sums must, however, be brought into account as part of the disposal value for the purpose of capital allowances (see subsection (3) and section 70E of CAA).
1159.Subsection (4) is new and provides a signpost to the definition of “termination value”.
1160.This section reduces the deductions which a lessee under a long funding operating lease of plant or machinery may make in calculating its profits for corporation tax purposes. It is based on section 502K(1) to (3) and (6) to (9) of ICTA.
1161.The amount of the deduction is reduced by reference to the expected reduction in value of the plant or machinery over the term of the lease. As the lessee is entitled to capital allowances, it effectively obtains relief through the allowances for the amount of the lease payments which it cannot deduct in calculating its profits.
1162.The words “had that value been estimated at the commencement of the term” have been added in subsection (6)(b) to explain the reasoning behind the use of the words “would have been expected” in section 502K(6)(b) of ICTA.
1163.This section determines the “starting value” of the plant or machinery for the purposes of the calculation required by section 379. It is based on section 502K(4) and(5) of ICTA.
1164.This section defines or provides signposts to the provisions defining terms used in the Chapter. It is based on section 502L of ICTA.
1165.To assist the user, this section expands on section 502L(4) of ICTA, rewritten in subsection (1), by including numerous signposts to specific sections of Part 6A of CAA in subsections (2) and (3).