Finance Leasing Manual - FLM6.53

Conversion of income into capital: avoiding capital allowances balancing adjustments

In addition to the lessor's interest being paid as part of a capital sum (see FLM6.52) a further twist potentially of general application was the avoidance of capital allowances balancing adjustments when the capital sum was paid.

Broadly, capital allowances go to the owner of machinery or plant or the holder of the relevant fixtures interest. If the kit was simply sold back to the lessee in return for a capital sum equal to the 'interest' plus the 'loan' there would be a full recovery of any capital allowances granted to the lessor. This was avoided by selling something which 'represented' the asset, rather than the asset itself which had generated the capital allowances. In other words, in economic reality the asset was sold but, legally, something else was sold, so avoiding the capital allowances recovery rules. See the example at FLM6.54.

We believe that FA97/S82 and FA97/SCH12 have blocked these schemes by:

• treating the lessor's minimum earnings for tax as equal to the earnings in its accounts;

• creating new capital allowances disposals occasions to bring in the proper disposal values.

See FLM27.01 onwards for full details.