Where assets have been transferred to the lessor company from
a connected party at any time prior to the relevant day the balance
sheet amount should be adjusted to reflect the market value of the
asset unencumbered by the lease. This matches the adjustment in
paragraph 7 (8). This adjustment is only made when the relevant day
falls after 22 March 2006.
The reason for this is that the asset may be acquired at tax
written down value. By bringing the market value of the asset into
account the PM – TWDV formula captures, and recovers, the
difference.
Example
A lessor company, B Ltd buys a ship for £10m. The ship
is subject to an operating lease.
On 9 September 2009 the ship is transferred to another group
company, A Ltd. The ship stands in the accounts of B Ltd at
£6m and its tax written down value is £2m.
The transfer takes place for £3m, generating a loss in
the accounts of B Ltd.
The transfer is within section 343 ICTA 1988 so that for tax
purposes the ship is treated as being transferred to A Ltd at its
tax written down value which is £2m.
In the accounts of the companies the ship is treated as
transferred at £3m.
A Ltd is sold on 30 September 2009 and the PM value in the
accounts is £3m.
If B Ltd had been sold on 9 September an income amount would
have been calculated using the carrying amount (£6m) and the
written down value (£2m) to give a charge of £4m. By
transferring the ship at £3m and selling A Ltd, the income
amount is calculated using the carrying amount (£3m) and the
written down value (£2m) to give a charge of £1m. The
charge has been artificially suppressed.
To prevent this paragraph 17 (7) substitutes the market value
of the ship.
Market value is determined as if the ship were unencumbered
by a lease. In this case it is agreed that the ship is worth
£6m and resulting charge is appropriate.
