BN 10: Sale of Lessors
Who is likely to be affected?
1. Companies carrying on a business of leasing plant or machinery.
General description of the measure
2. The measure affects arrangements that can lead to a loss of tax when a company carrying on a business of leasing plant or machinery is sold or otherwise changes hands or enters into transactions with a similar effect.
3. The measure brings into charge an amount which recovers the benefit that the company has derived from capital allowances and gives the new company an equal and opposite relief.
Operative date
4. The measure will apply where changes in the economic ownership of lessor companies occur on or after 5 December 2005.
Current law and proposed revisions
5. Lessor companies take advantage of the benefit of capital allowances to defer tax on the profits on long leasing transactions. The effect of this early relief is unwound as the lease progresses so that profits are brought into tax in the later period of the lease. These timing benefits are accessed where the lessor company is within a wider group through the surrender of early losses as group relief. This is a normal consequence of the availability of capital allowances and group relief. The tax profit profile is not matched in the commercial accounts of the company, which will typically report profits throughout.
6. The Government has become aware of increased activity designed to shelter the deferred profits from taxation. Typically this will take the form of a sale of the company to a group that has substantial losses that can be surrendered to the lessor company. When this happens the tax on the profits is further deferred, sometimes indefinitely.
7. The sale of lessors measure affects all sales of companies carrying on a leasing business and acts by bringing into charge an amount of income which is calculated by reference to the difference between the commercial position of the company and the tax position. The accounting period of the company is brought to a close and a relief is given in the next accounting period in the form of an exactly matching expense. The availability of the relief means that a sale of a lessor company that is not tax motivated will not be discouraged because the profit-making purchaser is likely to be willing to compensate the seller for the effect of the charge because the lessor company brings with it a valuable relief.
8. The charge and the relief are triggered by changes in the economic ownership of the lessor company and there are provisions to ensure that where there is only a partial sale the charge is reduced proportionately.
9. The measure covers leasing businesses carried on in a consortium structure and through a partnership. It also addresses other methods by which deferred profits on a leasing transaction can be sheltered from tax through unusual partnership profit sharing arrangements, the transfer of assets between parties at a value other than market value and transactions whereby the leased asset is sold and part or all of the income stream is retained.
10. The measure as published on 5 December 2005 will be amended to take account of developments in the reform of the taxation of leasing and in response to comments made following publication of the draft legislation. Where these changes have the effect of reducing the scope or effect of the measure these beneficial changes will have effect from 5 December. Other changes will have effect from 22 March.
11. The following changes reduce the scope of the measure and have retrospective effect:
- The definition of a plant or machinery lease will be aligned with that in leasing reform. This means that, for example, companies that enter into leasing transactions that are primarily leases of real property will not have ‘qualifying leased plant or machinery’ and so may be outside the scope of the charge.
- Where a ‘qualifying change of ownership’ occurs as a consequence of an internal reorganisation of a group of companies no charge will be triggered as long as all companies involved remain 75% subsidiaries of the principal company.
- Provisions which restricted access to losses derived from the relief will be changed to ensure that groups are now able to surrender losses derived from the relief as group relief over a period of at least twelve months after the change in ownership.
12. Provisions dealing with the disposal of a leased asset where income is retained will be changed to ensure that no amounts are taken into consideration twice nor fall out of tax.
- The draft legislation as published on 5 December treated as disposal
value the amount of the consideration received plus, in the case of a
finance lease, the net investment in the lease amount. The net investment
in the lease amount is calculated by reference to the future income stream
together with the expected residual value of the asset
subject to the lease. It is likely that the amount of consideration received will also reflect the expected residual value of the asset and as a consequence this amount could be taken into account twice. The provisions setting out how the disposal value is calculated will be changed so that the disposal value for capital allowances purposes is
the amount of consideration received plus the net present value of the future rentals retained by the seller. In cases where the consideration received equals or exceeds the original cost of the asset the whole of this amount will be the disposal value but no further amount in respect of the net present value of future rentals retained by the seller will be included in the disposal value. This change will have effect from 5 December 2005. - The 5 December draft legislation also excluded from taxation any future
rentals which had been taken into account in calculating the disposal
value. As a consequence of this, in almost all cases all future rentals
would fall out of account. The draft legislation will be changed so that
future rentals will be brought into charge over the remaining
term of the lease, to the extent that their value has not been treated as disposal value for capital allowances purposes. This change will have effect for rentals receivable on or after 22 March 2006. Rentals receivable before this date are therefore unlikely to be brought into charge.
13. A change will be made to prevent groups of companies manipulating the effect of the charge by transferring assets that are subject to leases from other group members to the lessor company at values other than market value. To prevent this, the value of any leased assets acquired directly or indirectly from connected parties will be taken to be market value for the purposes of determining whether the company is carrying on a business of leasing plant or machinery and for the purposes of calculating the charge. This change will apply to transactions occurring on or after 22 March 2006.
14. Draft legislation will be published before the end of March.
Further advice
15. If you have any questions about these changes, please contact Jo Brindley
on 020 7147 2571 or Malcolm Smith on 020 7147 2555.
