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The Government is legislating to counter avoidance involving a leaseback following the sale or lease of plant or machinery.
It will ensure that a business entering into such arrangements does not gain more relief than it would have done had it obtained loan finance.
The Government also said it intends to ensure that:
- tax is not avoided when a lessor grants a long funding lease; and
- when a long funding lease ends, the lessee has obtained an appropriate amount of relief.
A draft of the clause and Schedule will be incorporated into the 2009 Finance Bill.
Comments are invited and should be addressed to Ann Sterenberg.
Secondly, Sch 10 to the Finance Act 2006 was introduced to prevent a potential loss of tax when a lessor company is sold. Disclosures have revealed that the legislation does not operate as intended when the lessor company is acting as an intermediate lessor.
Draft legislation will ensure the schedule operates on an intermediate lessor in the same way it does for a head lessor. Comments should be addressed to Jo Brindley.
Finally, HMRC are acting againts partnerships that have invested in films attempting and then mitigated tax by means of converting existing leases into long funding leases.
These arrangements involve partnerships that acquired or produced films and typically leased them to other companies to be exploited over a period of typically up to 15 years, i.e. sale and leaseback arrangements.
The partnerships were able to claim relief for the cost of those films under of F(No 2)A 1992, s 42, F(No 2)A 1997 s 48, or ITTOIA 2005, ss 138 to 140. The rents under the lease are taxable and, in effect, these sale and leaseback arrangements allow the partners to defer their tax liability for up to 15 years.
HMRC understand that the arrangements that are intended to avoid tax require the partnerships to end the existing leases and replace them with new leases that are intended to qualify as long funding finance leases of plant or machinery.
If these new leases are long funding finance leases the majority of the rents receivable will not be taxed as ITTOIA 2005, s 148A (for income tax) or TA 1988, s 502B (for corporation tax) will apply.
In effect, the partnerships will have replaced a taxable income stream with one that is largely untaxed.
The Government does not accept that these arrangements have the effect that is sought, but will put the matter beyond doubt by including appropriate legislation in Finance Bill 2009.
This legislation will take effect from 13 November 2008. Comments or queries should be addressed to Paul Lane: 020 7147 2637.
