Capital Allowances On Plant Or Machinery Leased Outside The UK - Protected Leasing

Chapter 11 CAA 2001 restricts the capital allowances available on plant or machinery leased outside the United Kingdom (previously achieved by S 42 CAA 1990). The restrictions contained in Chapter 11 apply where the plant or machinery is leased to a person who is neither resident in the UK nor using the asset exclusively for earning profits chargeable to UK tax. However, allowances are not restricted where the asset is used for protected leasing. Protected leasing is defined in section 105(5) as short term leasing or the leasing of a ship, aircraft or transport container used for a qualifying purpose, as defined in sections 123 and 124.

Where there is a chain of leases, some may be protected and others may not. In Tax Bulletin 40 we announced that, with effect from 19 April 1999, the overseas leasing rules applied where any lease in the chain met the tests in section 42 CAA 1990 (as now enacted in Chapter 11 CAA 2001). Previously, the Inland Revenue had taken the view that the tests were applied to the end lessee only. The article did not make any specific reference to protected leasing, but in subsequent correspondence the Inland Revenue accepted that the protected leasing tests applied to the end lessee only.

The Solicitor of Inland Revenue has advised that this interpretation of the legislation is incorrect. The Solicitor has advised that that where there is a chain of leases, each of the leases, not just the end lease, must be examined to determine whether the leasing under it is protected leasing. If the leasing under any of the leases is not protected leasing, the overseas leasing legislation applies.

We will accept the previous interpretation for leasing arrangements entered into:

• before the date of the publication of this note, 3 February 2005
• within three months after the date of publication of this note where the principal terms of the leasing arrangement have been agreed in writing before the date of publication (for example in an agreed term-sheet or accepted offer letter) and have not materially altered since that date.

In all other cases we will apply the revised view that, if any of the leases in a chain is found not to be protected leasing, the restriction applies.

The guidance in the Capital Allowances manual is being amended to reflect the content of this note.