Finance Bill

Finance Bill - continued	House of Commons
SCHEDULE 22, TONNAGE TAX - continued

back to previous text

PART X

THE RING FENCE: CAPITAL ALLOWANCES: SHIP LEASING

Introduction

89. - (1) In the case of a finance lease of a qualifying ship provided, directly or indirectly, to a company within tonnage tax, the provisions of Part II of the Capital Allowances Act 1990 have effect subject to and in accordance with the provisions of-

paragraph 90 (defeased leasing),

paragraph 91 (sale and lease back arrangements, and

paragraphs 93 to 100 (quantitative restrictions on allowances).

(2) In this Part of this Schedule "finance lease", and "lessor" and "lessee" in relation to a finance lease, have the same meaning as in that Part (see section 82A of the 1990 Act).

(3) Other expressions used in this Part of this Schedule have the same meaning as in Part IX of this Schedule (the ring fence: capital allowances: general).

Defeased leasing

90. - (1) The lessor under the finance lease is not entitled to capital allowances in respect of expenditure on the provision of the ship if-

(a) the lease, or

(b) any transaction or series of transaction of which the lease forms a part,

makes provision the effect of which is to remove the whole, or the greater part of, any non-compliance risk which, apart from that provision, would fall directly or indirectly on the lessor.

(2) For this purpose a "non-compliance risk" means a risk that a loss will be sustained by any person if payments under the lease are not made in accordance with its terms.

(3) This paragraph does not apply to any provision so far as it consists of a guarantee or other security provided-

(a) by the lessee or a person connected with the lessee, or

(b) by a third party not connected with either the lessor or the lessee,

in relation to which the following conditions are met.

(4) The conditions are-

(a) that no deposit of money or other property by way of security is obtained by the lessor or a third party, or by any person connected with a third party;

(b) in the case of a guarantee or other security given by a third party, that it does not give rise to any payments to the lessor unless the lessee defaults on the rental payments under the lease; and

(5) For the purposes of this paragraph the lessor and any persons connected with him shall be treated as the same person.

(6) In this paragraph "connected person" has the meaning given by section 839 of the Taxes Act 1988.

Sale and lease-back arrangements

91. - (1) The lessor under the finance lease is not entitled to capital allowances if the lease is part of sale and lease-back arrangements.

(2) For this purpose "sale and lease-back arrangements" means, subject to sub-paragraph (3), any arrangements that take the following form:

Step One

The ship is owned by a tonnage tax company and used for the purposes of its tonnage tax trade.

Step Two

A transaction is entered into, as a result of which (apart from this paragraph) capital allowances would become available to the lessor, under which-

(a) the ship (or an interest in it) is sold, or

(b) a person enters into a contract on the performance of which he will or may become the owner of the ship (or an interest in it), or

(c) a person entitled to the benefit of any such contract assigns the benefit of it so far as it relates to the ship (or an interest in it).

Step Three

The ship continues to be used for the purposes of the tonnage tax trade either of the original company or of another tonnage tax company that is a member of the same group.

(3) Arrangements are not regarded as "sale and lease-back" arrangements if between Steps One and Three in sub-paragraph (2) the ship-

(a) is acquired by a person not connected with either the lessor or the lessee, and

(b) is used for the purposes of that person's trade,

provided that trade does not include the leasing of ships.

Certificates required to support claim by finance lessor

92. - (1) Any claim by the lessor under a finance lease for capital allowances in respect of expenditure on the provision of a qualifying ship must be accompanied by a certificate by the lessor and the lessee stating either-

(a) that the ship is not leased, directly or indirectly, to a company subject to tonnage tax, or

(b) that neither paragraph 90 (defeased leasing) nor paragraph 91 (sale and lease-back arrangements) applies in relation to the lease.

(2) If any matter so certified ceases to be the case, the lessor must give notice of that fact to the Inland Revenue.

(3) Any such notice must be given within three months after the end of the chargeable period in which the change takes place.

(4) In the second column of the Table in section 98 of the Taxes Management Act 1970 (penalty for failure to provide information etc.), after the final entry insert-

"	Paragraph 92(2) of Schedule 22 to the Finance Act 2000."

Quantitative restrictions on allowances

93. - (1) Where the lessor under the finance lease is entitled to capital allowances in respect of expenditure on the provision of the ship, the following provisions apply.

(2) There is no entitlement to any first-year allowance.

(3) The lessor is entitled-

(a) in respect of the first £40 million of the cost of providing the ship, to writing-down allowances at a rate of 25% per annum on the reducing balance, and

(b) in respect of the next £40 million, to writing-down allowances at a rate of 10% per annum on the reducing balance.

(4) The expenditure within each of those bands shall be allocated to separate pools and dealt with under Part II of the Capital Allowances Act 1990 in the same way as expenditure allocated to a class pool.

These pools are referred to below as "the 25% pool" and "the 10% pool".

(5) If the cost of providing the ship exceeds £80 million, the lessor is not entitled to capital allowances in respect of the excess.

Quantitative restrictions: further provisions as to rate bands, limit and pooling

94. - (1) The rate bands and limit in paragraph 93 (quantitative restrictions on allowances) apply separately in relation to each ship.

(2) The amounts specified in that paragraph apply in relation to the whole cost of providing the ship.

(3) If-

(a) the cost is shared by two or more persons, or

(b) a person acquires a part share in the ship,

that paragraph applies as if there were substituted in sub-paragraph (3)(a) and (b) and sub-paragraph (5) in relation to each person the proportion of the figure specified that his share of the cost bears to the whole cost.

(4) The pools referred to in sub-paragraph (4) of that paragraph are class pools of all expenditure of a lessor that falls to be allocated to a 25% or 10% pool in respect of ships leased by him.

Quantitative restrictions: meaning of "cost of providing ship"

95. - (1) For the purposes of paragraph 93 (quantitative restrictions on allowances) the cost of providing the ship means the total cost of providing it in a state ready to be brought into use for the purposes for which it is normally to be used.

This includes the cost of any accessories or additional equipment, or fitting out, necessary for the operation of the ship for those purposes.

(2) The cost of providing the ship shall be determined without regard to the provisions of the Capital Allowances Act 1990 as to-

(a) when expenditure is treated as incurred, or

(b) when expenditure may be brought into account as qualifying expenditure.

(3) Further capital expenditure by the lessor on the ship shall be added to the original cost of providing the ship to determine-

(a) whether the lessor is entitled to capital allowances in respect of the further expenditure, and

(b) if he is, the rate of writing-down allowances to which he is entitled.

References to the cost of providing the ship shall accordingly be read as including any such further expenditure.

(4) The amounts to be taken into account under this paragraph are limited to the amounts that would otherwise have been qualifying expenditure for the purposes of capital allowances.

Quantitative restrictions: treatment of disposal proceeds

96. - (1) The following provisions apply where-

(a) there is a disposal of a ship in relation to which paragraph 93 applied to restrict the capital allowances available, and

(b) a disposal value falls fall to be brought into account.

The reference in paragraph (a) to a disposal of ship includes a disposal of a part of a ship, or of an interest in a ship or a part of a ship.

(2) The disposal value is first allocated between the 25% pool and the 10% pool in the same proportions as the cost of providing the ship was allocated to those pools.

(3) If the amount allocated to the 25% pool exceeds the amount of qualifying expenditure remaining in that pool, any excess shall be taken to the 10% pool.

(4) A balancing charge arises only if the amount taken to the 10% pool exceeds the amount of qualifying expenditure remaining in that pool.

Quantitative restrictions: effect of entry into tonnage tax

97. - (1) This paragraph applies where-

(a) a finance lease is entered into at a time when the lessee is not subject to tonnage tax, and

(b) the lessee subsequently enters tonnage tax.

(2) For the purposes of this paragraph, and of any consequential adjustments required for capital allowance purposes, an accounting period of the lessor is treated as ending when the lessee enters tonnage tax.

(3) A disposal value equal to the tax written down value of the ship at the end of the lessor's accounting period ending with the lessee's entry into tonnage tax shall be brought into account in that accounting period in the lessor's pool then containing the relevant qualifying expenditure.

(4) For this purpose the tax written down value of the ship means what would be the balance of unrelieved qualifying expenditure determined on the following assumptions-

(a) that the relevant qualifying expenditure had been held in a single asset pool, and

(b) that there had been made to the lessor-

(i) the first-year allowance (if any) that was actually made to him,

(ii) any first-year allowance falling to be made to him that was postponed under section 30(1)(a) or (c) of the Capital Allowances Act 1990, and

(iii) the maximum amount of any writing-down allowances that, on the preceding assumptions, could have been made for accounting periods before the lessee's entry into tonnage tax.

(5) The lessor shall be treated as incurring qualifying expenditure equal to that amount on the provision of the ship for the purposes of the lessee's tonnage tax trade at the beginning of the lessor's accounting period beginning with the lessee's entry into tonnage tax.

(6) The same proportions of that qualifying expenditure shall be allocated to the lessor's 25% and 10% pools as the proportions of the actual cost of providing the ship that would have been so allocated if the lessee had been subject to tonnage tax at the material time.

Quantitative restrictions: effect of exit from tonnage tax

98. - (1) This paragraph applies where-

(a) a finance lease is entered into at a time when the lessee is subject to tonnage tax, and

(b) the lessee subsequently leaves tonnage tax.

(3) A disposal value equal to the tax written down value of the ship at the end of the lessor's accounting period ending with the lessee's leaving tonnage tax shall be brought into account in that accounting period in the lessor's 25% and 10% pools.

(4) For this purpose the tax written down value of the ship is what would be the balance of unrelieved qualifying expenditure on the following assumptions-

(a) that the relevant qualifying expenditure had been held in a single asset pool, and

(b) that there had been made to the lessor the maximum amount of any writing-down allowances that could have been made for accounting periods before the lessee's leaving tonnage tax.

(5) The lessor shall be treated as incurring qualifying expenditure on the provision of the ship for the purposes of the lessee's non-tonnage tax trade at the beginning of the lessor's accounting period beginning with the lessee's leaving tonnage tax.

(6) The amount of that expenditure is the whole of the expenditure on the ship that would have qualified for capital allowances if the lessee had never been subject to tonnage tax, written down at 25% per annum on the reducing balance for the period beginning with the date when it was actually incurred by the lessor and ending with the date on which the lessee leaves tonnage tax.

Quantitative restrictions: power to alter amounts by regulations

99. - (1) The Inland Revenue may by regulations alter the amounts for the time being specified in sub-paragraph (3)(a) and (b) and sub-paragraph (5) of paragraph 93 (quantitative restrictions on allowances).

(2) The regulations may contain such incidental, supplementary and transitional provisions as appear to the Inland Revenue to be appropriate.

Exclusion of leases entered into on or before 23rd December 1999

100. The provisions of this Part do not apply in relation to a finance lease entered into on or before 23rd December 1999.

Prepared 7 April 2000