Revenue & Customs Brief 40/07

Overseas leasing – sections 109 and 110 Capital Allowances Act 2001 – leases entered into before 1 April 2006

Chapter 11 of Part 2 of the Capital Allowances Act contains rules in connection with leasing plant or machinery to lessees based outside the UK.

Sections 109 and 110 restrict the amount of writing down allowances that may be claimed:

• where section 109 applies the rate of writing down allowances is reduced from 25% to 10%, but
• where section 110 applies no capital allowances are available.

We are aware of arguments that these rules are contrary to Community law. In particular it is argued that they constitute an unlawful restriction on the freedom to provide services. We now accept that in some circumstances these rules may be contrary to Community law and we have decided not to contest certain claims.

Therefore, where plant or machinery is used for overseas leasing and the lessee is resident in an EEA country we will adopt the following approach:

• where the relevant EEA country gives the lessee a relief that is broadly equivalent to capital allowances, we will apply s.109 to restrict the rate of writing down allowances to 10% but we will not apply s.110;
• where the relevant EEA country does not give the lessee a relief broadly equivalent to capital allowances we will accept that the lessor is entitled to the normal 25% rate of writing down allowances.

CT & VAT will be giving detailed advice to Inspectors on the circumstances in which a lessor leasing to a foreign lessee is entitled to capital allowances at the 25% or 10% rate and on how to settle outstanding cases.

Following changes made in Finance Act 2006 the overseas leasing rules do not apply to leases entered into on or after 1 April 2006.

Issued 24 May 2007