In a typical tax-driven transaction, a business grants a head
lease to a bank (or other lender) for a premium. The bank then
grants a typical finance lease to the business.
Commercially, this is equivalent to the bank making a loan to
the business and the business repaying it at interest.
However, the lease premium is generally regarded as a capital
receipt that is effectively not taxed on the recipient but the
rentals under the leaseback were claimed to be allowable for tax
purposes. The commercial effect is that the business (the head
lessor and sub-lessee) obtains a loan and get tax relief for
repaying it.
These arrangements were stopped by FA 2004. CAA01/S228B, as
applied to lease and leaseback transactions by CAA01/S228F which
denies relief for the capital element of the leaseback rentals. For
further guidance, see CA28910.
In a variant on these arrangements, the bank sold the lease
receivables at market value to a third party. This meant that the
bank did not account for the lease as a finance lease and that the
arrangements did not fall within s.228F because the lease did not
meet the definition of a finance lease in CAA01/S219.
Such arrangements are caught by the provisions of
ICTA88/S774A onwards.
