BN12 - Sale Of Lessor Companies Anti Avoidance

Who is likely to be affected?

  1. Companies carrying on a trade of leasing plant or machinery.

General description of the measure

  1. Legislation will be introduced in Finance Bill 2007 to counteract various arrangements that are designed to reduce or cancel the effect of the Sale of Lessor Companies legislation introduced in Finance Act 2006.

Operative date

  1. The measure will counteract some schemes with effect from 22 November 2006 and other schemes with effect from 21 March 2007.

Current law and proposed revisions

  1. Legislation introduced in Schedule 10 to Finance Act 2006 was intended to deter the sale of a lessor company when the sale was tax motivated by bringing into charge an amount of income and an expense calculated by reference to the balance sheet value of the leased asset where a change in the ownership or control of a lessor company occurred. The income amount is brought into charge in the selling group and the expense benefits the buying group.
  2. HM Revenue & Customs have received disclosures which reveal that groups have been undermining the effect of the Schedule by either:
  • exploiting a mismatch between two concepts of control, that used in Schedule 10 and that used in section 343 Income and Corporation Taxes Act 1988, allowing groups to transfer a leasing business outside the Schedule 10 grouping while enjoying the benefits of tax neutrality under section 343; or
  • manipulating the accounting value of leased assets to reduce or eliminate the charge.
  1. The Government announced on 22 November 2006 that it would take action to prevent this with immediate effect.
  2. Draft legislation was published at 2006 Pre-Budget Report to ensure that:
  • section 343(2) will not apply to the transfer of assets as part of the transfer of a business or part of a business of leasing, unless the predecessor and successor companies share the same principal company for the purposes of Schedule 10; and
  • contrived changes to balance sheet values will be prevented from affecting the operation of the Schedule.
  1. This restriction on the effect of section 343(2) was confined to companies that are 75% subsidiaries. Information received subsequently by HM Revenue & Customs has indicated that artificial structures involving lessor companies owned by consortia and companies carrying on a leasing business in partnership are also being created to take advantage of mismatches in these definitions of control.
  2. A new draft of the legislation is published today which deals with consortium companies and partnerships. The effect of the changes to the draft ensures that section 343 will not apply where:
  • either of the predecessor or successor companies is a consortium company carrying on a leasing business, unless the principal companies and the interests they hold in the companies are exactly matched; and
  • the predecessor or successor company carries on a leasing business in partnership unless the transfer is a transfer of the whole of a leasing business carried on by the predecessor company in partnership.
  1. These changes will be brought into effect from today. The counter-measures announced on 22 November will continue to have effect from that date.

Further advice

  1. Draft legislation and an explanatory note are published today and are available on the HM Revenue & Customs website
  2. If you have any questions about this change, please contact Jo Brindley on 020 7147 2571 or via email