Plant or machinery allowances often generate tax losses in
the early years of a lease. These losses should be recovered in
later years.
For example, an asset costing £100m might generate
commercial profits of £10m over the life of the lease but this
might be made up from tax losses of (say) £70m followed by tax
profits of (say) £80m. At the rate of 30%, if the tax losses
are effective the lessor gains £21m in tax relief. If the
profits are taxed that relief is recovered – with tax of
£24m being paid. This gives net tax payable of £3m, which
is equal to the tax due on the net profits of £10m.
The trick is to ensure that the tax on the profitable part of
the lease is never payable. Various schemes have been used to
achieve this. The simplest was to sell the lessor company to a
loss-making group as the lease became profitable. Other
arrangements involving partnerships were also used: here the trick
was to ensure the losses went to a profitable partner and the
profits to a partner that could shelter them in some way.
These schemes and the measures introduced to counter them are
described at BLM80000 onwards.
