Just as a finance lease may be a convenient (and tax
efficient) means of financing the initial purchase of plant or
machinery assets for use in a business, so existing plant or
machinery may be sold to a finance lessor and then leased back
(without ever leaving the factory floor) in order to refinance
existing borrowing or to obtain general business finance. Because
the user sells the legal title in the assets to the finance lessor,
the lessor may claim capital allowances, the benefit of which
filters through to the lessee in the form of more favourable rental
terms.
It is important to remember that there are two legs to the
transaction: the sale and the leaseback. Most consideration tends
to focus on the lease-back aspect. But the first leg of the
transaction involves the finance lessee disposing of an asset, and
the treatment of the disposal proceeds should not be overlooked.
It is also important to bear in mind that the economic
purpose of a sale and finance lease-back transaction is for the
trader (the lessee) to borrow money. If the borrowed money is used
for trading purposes, no difficulties arise. But if what is
effectively borrowed money is used for other purposes, or if the
effects of the borrowing arrangements are largely circular (so
that, broadly speaking, the funds end up back in the lender's
hands) the only effect of which is to give the lessor capital
allowances, such cases should be examined closely - see
BLM35060.
