As explained in CIRD27060, finance leased intangible assets which under the general rule are excluded from FA02/SCH29 except as regards royalties are wholly excluded in the hands of the lessor company . It is possible that a company may hold an intangible fixed asset in this partially excluded category for a period but, either before or after that period, it may finance lease the asset (so that it is then wholly excluded). To ensure that royalties are properly taxed, whether under Schedule 29 or under the general CT rules, in these (exceptional) circumstances the regulations provide that:
Where an intangible asset already within the scope of Schedule
29 begins to be finance leased it will change its character in the
finance lessor’s accounts (from an intangible fixed asset to
a financial asset) and may also be revalued in accordance with
SSAP21/IAS17 (see
CIRD27020). The revaluation will
generate an accounting profit or loss.
The regulations provide for the purposes of Schedule 29 that
in these circumstances the asset is treated as realised (so that
the rules described in
CIRD13210 onwards apply) for proceeds
which include the initial value of the asset under SSAP21/IAS17.
This ensures that any accounting profit or loss is recognised on
the inception of the finance lease.
It is possible that only a part of the intangible fixed asset
within Schedule 29 may become the subject of a finance lease. Under
the rule described above this transaction is regarded as giving
rise to a part realisation of the asset. To establish what
proportion of the cost of the asset should be set against the
deemed part realisation proceeds the rules described in
CIRD13260 apply. The regulations ensure
that these work as intended by providing that in computing the
reduction in the accounting value of the partly realised asset the
initial value of the asset under SSAP21/IAS17 is excluded.
A company holds an intangible fixed asset (say some computer
software) which it uses in its own business. The asset comes within
Schedule 29 and has a tax value (equal to its carrying value) of
£900. It begins to finance lease half of the software. The
initial cost under SSAP21 of the financial asset thereby created is
£500 and a profit of £50 (£500 - [½ x
£900]) is recognised.
Under the rules described CIRD13260 on the part realisation
of an asset, a proportion of the tax cost of the asset needs to be
set against the part realisation proceeds to arrive at the taxable
credit or deductible debit on the realisation. This cost is
calculated by multiplying the tax value of the asset in the ratio
of the reduction in the accounting value of the asset (as a result
of the realisation) to the accounting value immediately prior to
the realisation. If this approach is applied as it stands to the
deemed part realisation on the inception of the finance lease, the
amount of the cost to be set against the deemed proceeds is too
small.
This is because, in calculating the reduction in the
accounting value of the asset, the accounting value immediately
after the realisation is deducted from the value immediately
beforehand. The accounting value immediately after the realisation
arguably includes not only the value of the part of the asset which
is not finance leased (£450) but also the initial value of the
finance leased asset (£500).
Without amendment therefore the fraction of the cost to be
set against the deemed proceeds would be:
In figures that would be (£900 - [£450 + £500]) /
£900. The answer is a negative fraction so that no part of the
cost of the asset could be set against the part realisation and the
whole of the deemed proceeds (£500) would represent the
taxable profit on the transaction.
By excluding the accounting value of the asset (£500)
immediately after the deemed realisation from the fraction, it
become (£900 - £450) / £900 = 0.5. Half the
accounting value of the asset immediately before the part
realisation (£900) can be set against the deemed proceeds of
£500. The taxable credit is therefore £500 - (0.5 x
£900) = £50, the same as the accounting profit.
