Finance Leasing Manual - FLMAppx4

Schedule 12 FA 1997: published Notes on Finance Bill amendments

This Appendix reproduces the two Notes on the changes made for Report Stage of the Finance Bill. The Notes reflect the view taken at the time the amendments to the Bill was published in March 1997. Later explanations of our view, including those elsewhere in this manual, take priority. However, the Notes have been included in case they are cited by others and in case the general background is helpful. The original numbering and layout has been preserved. This means, in particular, that details of the amendment are shown first and then follows the Explanatory Notes.

FLMAppx3 reproduces the Note on clause 80 and Schedule 11 of the 1997 Finance Bill. This was published at the same time as the amendments themselves were Tabled in March 1997. After amendments at Report Stage these provisions became Section 82 and Schedule 12 FA 1997.

First Note: capital allowances amendments

Amendment Page Line
19 168 12

Mr Chancellor of the Exchequer, Rushcliffe, Con

Page 168, line 12 Schedule 11, leave out from beginning to end of line 38 on page 170 and insert-

'Capital allowances

11.-(1) This paragraph applies in any case where an occasion occurs on or after 26th November 1996 on which a major lump sum falls to be paid in the case of the lease of the asset.

(2) In this paragraph 'the relevant occasion' means the occasion mentioned in sub-paragraph (1) above.

(3) If capital expenditure incurred by the current lessor in respect of the leased asset is or has been taken into account for the purposes of any allowance or charge under any of the following groups of provisions, that is to say-

(a) Sections 520 and 521 of the Taxes Act 1988 (patent rights),

(b) Part II of the Capital Allowances Act 1990 (machinery and plant), or

(c) Part IV of that Act (mineral extraction allowances),
the group of provisions in question ('the relevant provisions') shall have effect as if the relevant occasion were an event by reason of which a disposal value is to be brought into account of an amount equal (subject to any applicable limiting provision) to the amount or value of the major lump sum.

(4) In this paragraph 'limiting provision' means a provision to the effect that the disposal value of the asset in question is not to exceed an amount ('the limit') described by reference to capital expenditure incurred in respect of the asset.

(5) Where-

(a) by virtue of sub-paragraph (3) above, a disposal value ('the relevant disposal value') falls or has fallen to be brought into account by a person in respect of the leased asset for the purposes of the relevant provisions, and

(b) a limiting provision has effect in the case of those provisions,

sub-paragraph (6) below shall apply.

(6) Where this sub-paragraph applies, the limiting provision shall have effect (if or to the extent that it would not otherwise do so)-

(a) in the case of the relevant disposal value, and

(b) in the case of any simultaneous or subsequent disposal value,

as if, instead of any particular disposal value, it were the aggregate amount of all the disposal values brought into account for the purposes of the relevant provisions by the current lessor in respect of the leased asset which is not to exceed the limit.

(7) In sub-paragraph (6) above 'simultaneous or subsequent disposal value' means any disposal value which falls to be brought into account by the current lessor in respect of the leased asset by reason of any event occurring subsequent to, or at the same time as, the event by reason of which the relevant disposal value falls to be brought into account.

(8) If any allowance is or has been given in respect of capital expenditure incurred by the current lessor in respect of the leased asset under any provision of the Capital Allowances Acts other than those specified in sub-paragraph (3) above, an amount equal to the lesser of-

(a) the aggregate of the allowances so given (so far as not previously recovered or withdrawn),

(b) the amount or value of the major lump sum,

shall, in relation to the current lessor, be treated as if it were a balancing charge to be made on him for the chargeable period or its basis period in which falls the relevant occasion.

(9) If there is or has been allowed to the current lessor in respect of expenditure incurred in connection with the leased asset any deduction by virtue of-

(a) Subsection (3) of Section 68 of the Capital Allowances Act 1990 (films, tapes and discs), so far as relating to expenditure to which Subsection (1) of that Section applies, or

(b) Section 42 of the Finance (No 2) Act 1992 (production or acquisition expenditure on films),
sub-paragraph (10) below shall apply.

(10) Where this sub-paragraph applies, the current lessor shall be treated as if receipts of a revenue nature of an amount equal to the amount (if any) by which-

(a) the amount or value of the major lump sum, exceeds

(b) the amount or value of so much of the major lump sum as is treated as receipts of a revenue nature under Section 68(8) of the Capital Allowances Act 1990,
arose to him from the trade or business in question on the relevant occasion.

(11) If there is or has been allowed to the current lessor in respect of capital expenditure incurred in connection with the leased asset any deduction by virtue of-

(a) Section 91 of the Taxes Act 1988 (cemeteries etc.), or

(b) Section 91A or 91B of that Act (restoration and preparation expenditure in relation to a waste disposal site),
sub-paragraph (12) below shall apply.

(12) Where this sub-paragraph applies, the current lessor shall be treated as if trading receipts of an amount equal to the lesser of-

(a) the amount or value of the major lump sum,

(b) the deductions previously allowed,
arose to him from the trade in question on the relevant occasion.

(13) If, in a case where this paragraph applies, allowances are or have been made to a person ('the contributor') by virtue of Section 154 of the Capital Allowances Act 1990 (allowances in respect of contributions to capital expenditure) in respect of his contribution of a capital sum to expenditure on the provision of the leased asset, the foregoing provisions of this paragraph shall have effect in relation to the contributor and allowances by virtue of that Section in respect of the contribution as they have effect in relation to the current lessor and allowances in respect of capital expenditure incurred by him in respect of the leased asset.

(14) In sub-paragraph (8) above, 'chargeable period or its basis period' shall be construed in accordance with the Capital Allowances Act 1990.

(15) In the application of sub-paragraph (8) above-

(a) in relation to a trade, profession or vocation set up and commenced on or after 6th April 1994, or

(b) as respects the year 1997-98 or any subsequent year of assessment in relation to a trade, profession or vocation set up and commenced before 6th April 1994,

that sub-paragraph shall have effect with the omission of the words 'or its basis period' and sub-paragraph (14) above shall accordingly have effect with the same omission.'.

EXPLANATORY NOTE

SUMMARY

1) The purpose of amendment 19 is to align the capital allowances treatment of new Part I leases with those for existing Part I leases.

2) Under the proposed rules in Part I of Schedule 11, finance leases involving capital payments entered into on or after Budget Day are denied capital allowances altogether. Capital allowances remain available for leases in existence prior to Budget Day but normal disposal computations are required by the proposals, even if an indirect disposal method is used.

3) The effect of the amendment is to give the same capital allowances treatment to new finance leases as that proposed for existing leases. Thus capital allowances for new leases will be available but subject to normal disposal computations even if an indirect disposal method is used.

4) This amendment responds to fears expressed by specialists in the field that, under the provisions as originally drafted, some minor, incidental features of some new finance leases could arguably cause the right to claim capital allowances on the leased asset to be lost altogether from the outset. The cost is negligible.

5) Amendment 19 makes the substantive changes by deleting the existing paragraphs 11 and 12 and substituting a new paragraph 12. A separate amendment, No 23, makes consequential changes to the summary in paragraph 1(2).

DETAILS

6) Paragraph 11(1) applies the capital allowances recovery rules when a major lump sum falls to be paid on or after 26th November 1996.

7) Paragraph 11(2) defines 'the relevant occasion' as one when a major lump sum falls to be paid.

8) Paragraph 11(3) introduces the rules dealing with patents, machinery and plant and mineral extraction allowances. The major lump sum received by the lessor is treated as a disposal value for capital allowances purposes. However, the rules in paragraph 11(4)-(7) limit the disposal value to the cost of the asset.

9) Paragraph 11(4) defines a 'limiting provision' to mean one which limits the disposal value of an asset to cost.

10. Paragraph 11(5) applies the 'limiting provision' rules in paragraph 11(6) to cases in paragraph 11(3).

11. Paragraph 11(6) ensures that, overall, the disposal value cannot exceed the cost of the asset where there is more than one simultaneous or subsequent disposal.

12. Paragraph 11(7) defines 'simultaneous or subsequent disposal' for the purposes of paragraph 11(6).

13. Paragraph 11(8) deals with the recovery of any capital allowances apart from those set out in paragraph 11(3). The lessor is deemed to have a balancing charge equal to the smaller of the allowances previously given and the major lump sum.

14. Paragraph 11(9) deals with the recovery of any special reliefs for films, tapes and discs) by applying paragraph 11(10).

15. Paragraph 11(10) treats the lessor as getting a revenue receipt equal to the excess of the major lump sum over so much of that sum as is already treated as a revenue receipt by Section 68(8) CAA 1968.

16. Paragraph 11(11) deals with the reliefs for cemeteries, restoration and preparation expenditure by applying paragraph 11(12).

17. Paragraph 11(12) treats the lessor as receiving a trading receipt equal to the smaller of the major lump sum and the deductions previously allowed.

18. Paragraph 11(13) recovers any allowances given to a 'contributor' towards capital expenditure.

19. Paragraph 11(14) applies the Capital Allowances Act 1990 definition of 'chargeable period or its basis period' for the purposes of paragraph 11(8).

20. Paragraph 11(15) modifies the definition in paragraph 11(14) for trades etc dealt with under the self-assessment rules.

Note 2: consequential amendments

Amendment Page Line
23 160 12

Mr Chancellor of the Exchequer, Rushcliffe, Con
Page 160, line 12, Schedule 11, leave out from 'where' to second 'the' in line 18.

EXPLANATORY NOTE

SUMMARY

1) Amendment 23 is consequential upon Amendment 19. The purpose of both is to align the capital allowances treatment of new Part I leases with those for existing Part I leases.

2) Under the proposed rules in Part I of Schedule 11 as originally published in the Bill, finance leases involving capital payments entered into on or after Budget Day are denied capital allowances altogether. Capital allowances remain available for leases in existence prior to Budget Day but normal disposal computations are required by the proposals, even if an indirect disposal method is used.

3) The amendment aims to give the same capital allowances treatment to new finance leases as that proposed for existing leases. Thus capital allowances for new leases will be available but subject to normal disposal computations even if an indirect disposal method is used.

4) The amendments respond to fears expressed by specialists in the field that, under the provisions as originally drafted, some minor, incidental features of some new finance leases could arguably cause the right to claim capital allowances on the leased asset to be lost altogether from the outset. The cost is negligible.

5) Amendment 19 makes the substantive changes by deleting the existing paragraphs P11 and 12 and substituting a new paragraph 12. Amendment 23 makes consequential changes to the summary in paragraph 1(2).

DETAILS

1) Paragraph 1 of Schedule 11 contains a summary of the detailed rules in paragraphs 2 to 15. This aims to give the reader a bird's eye view of the general effect of the rules before moving on to the detail.

2) Amendment 19 deletes paragraphs 11 and 12 which deal with capital allowances. Paragraph 11 dealt with new schemes and paragraph 12 dealt with existing schemes (ie those in place before Budget Day). Amendment 19 then substitutes a new paragraph 11 which applies the previous rules for existing schemes across the board; that is, to new schemes as well as existing schemes.

3) As a consequence, the summary in paragraph 1(2)(b) and (c) needs amendment to reflect the change. Paragraph 1(2)(b) dealt with new schemes and paragraph 1(2)(c) dealt with existing schemes.

4) The effect of amendment 23 is to delete the new scheme summary in paragraph 1(2)(b) and suitably amend paragraph 1(2)(c) so that it applies to new and existing schemes.