Finance Leasing Manual - FLM6.68

Sales and leasebacks where the lessor's risk has been reduced

Some sale and leaseback schemes did not involve any new finance, just the sale of the benefit of the capital allowances - for instance by using the sale proceeds, after deducting the sale price for the tax benefit, to pay the rentals under defeasance arrangements. Section 46(2) F(No 2)A 1997 counters these types of arrangements; its effect is that no capital allowances are given to the lessor where machinery and plant is sold and leased back under a finance lease and, as part of the leasing arrangements, the lessor divests himself of the greater part of the risk of not getting its money under the lease. The new rules do not apply to expenditure to which the claimant was contractually committed before 2 July 1997.

In the leasing industry these kinds of scheme are sometimes called 'defeasance leasing' (the concepts were probably developed in the US and the terms reflect their US origin).

If you deal with a finance lessor it might be appropriate to ask about this kind of leasing and about similar arrangements which are designed to protect the lessor from risk. Please let Special Investigations Section see schemes where the lessor protects itself from risk in such a way, both to consider the relevance of the new legislation in Section 46 F(No 2)A 1997 and the general law which may be applicable to expenditure to which the claimant was contractually committed before 2 July 1997, see FLM6.69.