Plant or Machinery Rent Factoring

Section 785A ICTA

Preliminary Guidance

Introduction

  1. We have been asked to offer some guidance on how new section 785A ICTA (as introduced by Clause 135 Finance Bill 2004) will operate in practice. This note deals with two particular issues:
  • the interaction between s 785A and the existing rent factoring legislation in section 43A to 43G ICTA 1988, and
  • the interaction between s 785A and sections 343 ICTA 1988 and 266-267 CAA 2001.
  1. More general guidance on our interpretation of section 785A will be published on the IR website in the near future

Outline of section 785A

  1. Rent factoring is the sale of the right to receive rents. The right to receive rents over a period of time is valuable, but a business may prefer to realise that value up-front, rather than over the period of the lease. The right to receive the rents is therefore sold for a lump sum that realises most of the value but which also allows the purchaser – usually a bank or other finance house – to make a commercial profit from the receipt of the rents over time.
  2. In some circumstances the lump sum may be taxable as income but the transactions could be structured so that the lump sum would not be brought into charge as income of the seller (i.e. a capital sum). Where the lump sum is capital it could effectively escape taxation, either because of costs that could reduce the gain to nil (or nearly so) or because of the availability of capital losses.
  3. Section 785A addresses this tax avoidance by ensuring that, where the right to receive all or part of the rental stream arising from a lease of plant and machinery is sold or otherwise transferred to another person (s785A(1) and (3)), the proceeds are brought into charge as income if they would not otherwise be brought into account as income (s785A(2)).
  4. Section 785A recognises that businesses may not only sell the rental stream from the lease of a plant or machinery asset but may also sell the underlying asset. Where businesses sell or otherwise transfer the underlying asset then provided all the lump sum is brought into account as a capital allowances disposal receipt then no further charge arises under section 785A (s785A(1)(d)).

Interaction with existing legislation in sections 43A to 43G ICTA 1988

  1. Legislation was introduced by FA 2000 to counter schemes involving the transfer of the right to receive rent from leases of land. This legislation, in section 43A to 43G ICTA 1988, augmented long-standing legislation, in particular that in sections 36 and 780 ICTA 1988, that tackled earlier forms of tax avoidance using property transactions. It took the approach of treating the proceeds from the sale of rental streams as income when they might otherwise have been regarded as a receipt of capital.
  2. Section 785A deals with leases of plant or machinery. Plant or machinery is not normally ‘land’ but may be treated as part of the ‘land’ when it is a fixture. The interaction between s785A and s43A to 43G therefore needs to be considered when fixtures are involved.
  3. Whether plant or machinery is a fixture or not is a complex matter of land law (the detail of this is outside the scope of this Note). There are two obvious situations–
  • a lease of land that includes plant and machinery that are fixtures and so form part of the 'land' leased, for example a building with air conditioning;
  • a lease of plant that is a fixture (and so part of the land) but which lease does not include the physical land to which the fixture is attached. Typically this will arise under an agreement where a person who does not have an interest in the relevant land incurs capital expenditure on the provision of a fixture and leases it, directly or indirectly, to another person.
  1. In the first situation the lease – even if it includes plant and machinery – will be a lease ‘of land’. Leases of land fall within the provisions of section 43A to 43G.
  2. In the second situation the lease is an equipment lease (see section 174 CAA 2001). Equipment leases are leases of plant and machinery and fall within the provisions of section 785A.
  3. More complex arrangements may require a detailed review of the arrangements between the parties. Where there is uncertainty as to whether a receipt for the sale of a rental stream is one to which s785A applies the recipient may make an application under the Code of Practice 10 procedure if they so wish.

Interaction with sections 343 ICTA 1988 and 266-267 CAA 2001

  1. A transfer of a trade within the meaning of s343 ICTA 1988 will not give rise to a charge under section 785A. Similarly a transfer of an asset between connected parties as part of a succession to a qualifying activity within section 266 will not give rise to a charge under section 785A.
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