REV BN 29: Double Benefit Leasing
Who is likely to be affected?1. Where businesses gain a double benefit from the sale and leaseback or lease and leaseback plant or machinery, and to both incorporated and unincorporated businesses. General description of the measure2. Some businesses have exploited the capital allowance rules by entering into transactions that give them an unintended tax advantage. Plant or machinery is sold for a sum, or leased out for a premium, that is largely or wholly untaxed, allowing the business to retain capital allowances. The plant or machinery is then leased back and the lease rentals are allowable for tax purposes, giving the businesses a double benefit of the capital allowances retained and the deductible lease rentals. The commercial effect of the transactions is that the business has borrowed money and obtains tax relief for all or part of the cost of repaying the amount borrowed. 3. This new measure will remove the unintended tax benefits for lessees by limiting the relief for the lease rental payments, bringing the tax treatment of these transactions more closely into line with their commercial substance. Operative date4. The new legislation will apply from today to all rental payments which fall due on or after today. It will therefore apply to rental payments arising under new and existing arrangements. Current law and proposed revisionsThe leasing arrangements5. Capital allowances enable the cost of plant and machinery to be written off against a business’s taxable profits. They take the place of depreciation charged in the commercial accounts, which is not allowed for tax. There are two ways in which the capital allowances rules have been exploited. 6. In one variant the business sells plant or machinery to a lessor and finance leases it back so that it may continue to use it in its business. The other involves plant or machinery that is not sold, but instead leased out at a premium and then leased back to the original user. 7. In both cases the leases replicate many of the commercial effects of a loan but aim to get tax deductions for the loan repayments as well as the interest charge, whilst retaining the benefit of capital allowances. Who will be affected?8. The new measure will affect sale and finance leasebacks as defined in Chapter 17, CAA 2001. It will also affect arrangements where the plant and machinery is not sold but where the owner grants a lease over the plant or machinery for a premium and the plant or machinery is leased back for use by the owner or a person connected with him. Effects on lessees9. Where a lessee accounts for the lease as a finance lease the amount of the rentals allowable as a deduction will be restricted to the finance charge element of the lease rentals shown in the lessee’s accounts plus, in the case of a sale and leaseback, a further amount. The further amount will be equivalent to the disposal proceeds brought into account for capital allowances purposes. The deduction for this amount will be spread over the life of the lease in proportion to the depreciation of the leased asset. 10. Where a business enters into a lease and finance leaseback of plant and machinery no disposal proceeds are brought into account for capital allowances purposes. Accordingly, the only allowable deduction will be the finance charge element of the rentals. 11. In most arrangements the lessee will account for the lease as a finance lease under generally accepted accounting practice (GAAP). It is, however, possible that in some cases the lease could be accounted for as an operating lease by the lessee but as a finance lease in the consolidated accounts of the group. In these circumstances the new measure will apply to the lessee as it would if his accounts had reflected the treatment in the consolidated accounts of the group. 12. Transitional rules will apply where leases rentals are payable under existing arrangements. Where a period of account straddles Budget day the amount of rentals that would have been allowed as a deduction for tax purposes for the period will be apportioned so that any amount attributable to the period up to Budget day will remain allowable. In addition, the rules will ensure that where a lease rental is payable before today, the lease rentals are allowable on the basis of the current regime, whenever accounted for. 13. If a lease were to be terminated on or after today it would be possible to make arrangements that would enable the tax benefits to be retained. In contrast, if the lease runs to term the benefits will be recovered through restricting the allowable amount of lease rentals. Therefore the measure will introduce rules so that, where a lease is terminated on or after today, the lessee will be charged to tax on a deemed income receipt of an amount equivalent to the lease rentals that would not have been allowable in computing profits had the lease run to its full term. 14. Where a lessee assigns a lease the measure will treat the assignment as if it were the termination, and create a tax charge on the basis set out above for terminations. Effects on lessors15. Under the current regime lessors are taxed on the gross rentals receivable and, in leases affected by this measure, have no or limited entitlement to capital allowances. In future lessors entering into these arrangements will be taxed on their gross earnings as defined by GAAP (in effect only the finance charge element of the rentals) plus that part of the rental income which recovers the capital expenditure on which capital allowances are available. 16. In a lease and leaseback the lessor does not incur any qualifying expenditure, so no capital allowances will be available and only the gross earnings will be taxable. 17. Transitional rules will apply where leases rentals are receivable under existing arrangements. Where a period of account straddles Budget day the rentals received or receivable in the period up to Budget day will remain taxed under the existing rules. Further adviceIf you have any questions about this change, please contact Malcolm Smith on 020 7438 7450.
|
| Home | ||||
