UK and International Tax news
Long Funding Finance Leases
Sunday 20th March 2011
The Government have recently announced that legislation is being introduced in the Finance Bill 2011 to counter a tax avoidance scheme involving capital allowances on plant or machinery using a payment of a guarantee of residual value for long funding leases which, it is claimed, gives rise to tax relief for up to twice the amount of the payment.
The proposed legislation will apply where there is a residual amount guaranteed in connection with a long funding lease where it is reasonable to assume that any payment made under such a guarantee would lead to other relief being given as a result of making that payment. Such an assumption is to be made ignoring any other arrangements that may have been entered into at the same time.
Under current law, a lessee under a long funding finance lease is treated as incurring capital expenditure on plant or machinery per s.70A CAA 2001. The amount of that expenditure per s.70C CAA 2001 can include any part of the expected residual value of the leased asset at the end of the lease guaranteed by the lessee or a person connected with the lessee. Where the lessee is called on to make a payment under that guarantee, the effect of this is to reduce the disposal value at the end of the lease computed in accordance with s.70E CAA 2001.
The disclosed avoidance scheme seeks to obtain tax relief for more than the actual amount of the expenditure. The scheme involves arrangements which are claimed to have the effect of guaranteeing the value of the leased asset at the end of the lease but that guarantee is taken into account again, when paid, for tax relief purposes.
The changes to the legislation announced are to put beyond doubt that a lessee under a long funding lease cannot claim tax relief more than once on the expenditure that is referable to the guarantee.
For arrangements entered into on or after 9 March 2011, a lessee will not be able to include in capital expenditure relating to the lease a residual amount guaranteed under a long funding lease to the extent that it is reasonable to assume that relief would be available in respect of amounts when actually incurred under that guarantee, or would have been available but for other arrangements entered into at the same time.
In addition, the actual payment under that guarantee will not have the effect under s. 70E CAA 2001 of reducing the disposal value at the end of the lease, again if it is reasonable to assume that other relief will be available on that amount or would have been available but for other arrangements entered into.
For arrangements entered into before 9 March 2011, where a payment is made under a guarantee and it is reasonable to assume that relief will be given for that payment otherwise than relating to the lease then that payment will be excluded from, and consequently will not reduce, the disposal value at the end of the lease under s.70E CAA 2001.
The effect of the legislation announced is that the lessee will continue to be able to claim capital allowances on the full amount of expenditure incurred but it clarifies that the lessee can not obtain relief in excess of the actual amount of that expenditure.
If you would like to discuss the implications of this case in more detail, please contact Keith Rushen on +44 (0)20 7486 2378.Contact Us