A lessor may incur expenditure on the provision of plant or
machinery for leasing under a long funding lease before the Finance
Act 2006 received Royal Assent on 19 July 2006 and yet the lease
may not be an excepted lease.
If the lease is not an excepted lease and there was a
pre-existing heads of agreement for that long funding lease before
21 July 2005, the expenditure is split into two parts. The first
part is expenditure incurred before 19 July 2006 and the other part
expenditure incurred on or after that date.
The two parts are treated as if they had been incurred on
providing separate assets.
The part relating to expenditure incurred before 19 July 2006
is treated as expenditure on an asset that is subject to an
excepted lease and so the long funding lease legislation does not
apply to it.
The other part is treated as if it had been incurred on an
asset for leasing under a long funding lease to which the long
funding lease legislation applies.
The rentals attributable to each asset are to be determined
on a just and reasonable basis.
As a general rule, FA06/SCH8/PARA22 provides that the normal
rules about when expenditure is incurred apply.
There may have been attempts to avoid the introduction of the
rules for long funding leases by varying the terms of an agreement
so that an obligation to pay which would have become unconditional
on or after 19 July 2006 becomes unconditional before that date. If
it were effective this would have the effect of treating the
expenditure as relating to an asset that was to be subject to an
excepted lease.
HMRC took, and still takes, the view that such a variation
would not have that effect but this was put beyond doubt by an
announcement on 22 March 2006. As a result, where the variation
takes place on or after 22 March 2006 paragraph 22 (7) of Schedule
8 ensures that the expenditure is incurred on the date on which it
would have been treated as incurred before the variation.
