Finance Leasing Manual - FLM6.69

Defeasance leasing: general law

Ensign Tankers (Leasing) Ltd v Stokes 64 TC 617, decided by the House of Lords in 1992, was a case involving defeasance leasing, see FLM6.68. However it concerned a complex scheme and so it is not easy to analyse where the boundaries lie under general tax law and precisely why the Revenue succeeded.

Briefly, the original owner of an asset (a US company) loaned the cost of the asset to Ensign, which immediately paid the money back to the US company to acquire the asset. Ensign then leased the asset back to the US company. If the scheme had succeeded, the net present value to Ensign of the upfront first-year allowance (100% available at that time) it claimed against other taxable profits, would have been shared with the Americans. But Ensign had no obligation to repay the loan except out of its share of any profits in the asset over all its costs. If there had been profits, there would have been another, instantaneous and circular flow of cheques: the US company would pay Ensign some profits and Ensign would uses them to repay a corresponding amount of loan. In practice, Ensign could never touch any real money; the financial arrangements were such that Ensign could not cash the loan cheque before buying the asset.