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Finance Bill
Schedule 23 — Finance leasebacks: transitional provision
409

Schedule 23
Section 134

Finance leasebacks: transitional provision
Introduction
1     (1)
Sections 228B to 228E of the Capital Allowances Act 2001 (c. 2) (as inserted
by section 134) are subject to paragraphs 2 to 9 of this Schedule in their
5
application in relation to existing leasebacks.
      (2)
Paragraph 10 of this Schedule makes provision in relation to the taxation of
chargeable gains where an existing leaseback terminates.
Section 228B
2     (1)
This paragraph applies if the pre-commencement rentals are greater than the
10
total of the actual rental deductions for periods of account up to, but
excluding, the transitional period of account.
      (2)
Section 228B shall not apply in relation to—
(a)
the transitional period of account if the lessee’s excess rentals are
greater than the notional rental deduction for that period, or
15
(b)
a subsequent period of account if the unrelieved portion of the
lessee’s excess rentals is greater than the notional rental deduction
for that period.
      (3)
Section 228B is subject to sub-paragraph (4) in its application to—
(a)
the transitional period of account if the lessee’s excess rentals are not
20
greater than the notional rental deduction for that period, or
(b)
a subsequent period of account if the unrelieved portion of the
lessee’s excess rentals is not greater than the notional rental
deduction for that period.
      (4)
The permitted maximum for that period of account is the total of—
25
(a)
the lessee’s excess rentals (in the case of the transitional period of
account) or the unrelieved portion of the lessee’s excess rentals (in
the case of a subsequent period of account), and
(b)
the amount given by this calculation—

where—
30
“Basic Amount” means the amount calculated in accordance with
section 228B(2),
“Notional Rental Deduction” means the notional rental deduction for
the period of account in question, and
“Deductible Excess” means the amount included in the permitted
35
maximum by virtue of sub-paragraph (4)(a).
      (5)
But where, in relation to the transitional period of account, the amount given
by sub-paragraph (4) is less than the appropriate fraction of the notional
rental deduction for that period, the permitted maximum shall be that
fraction of that deduction.
40
      (6)
In this paragraph—
(a)
“the lessee’s excess rentals” means—
(i)
the pre-commencement rentals, minus

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Schedule 23 — Finance leasebacks: transitional provision
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(ii)
the total of the actual rental deductions referred to in sub-
paragraph (1), and
(b)
“the unrelieved portion of the lessee’s excess rentals”, in relation to a
period of account, means—
(i)
the lessee’s excess rentals, minus
5
(ii)
the total of the actual rental deductions for periods of account
from and including the transitional period up to, but
excluding, the period in question.
      (7)
In this paragraph—
“actual rental deduction”, in relation to a period of account, means the
10
amount that may be deducted in respect of amounts payable under
the existing leaseback in calculating the lessee’s income or profits
for that period of account for the purpose of income tax or
corporation tax;
“notional rental deduction”, in relation to a period of account, means
15
the amount that could, if section 228B did not apply, be deducted in
respect of amounts payable under the existing leaseback in
calculating the lessee’s income or profits for that period of account
for the purpose of income tax or corporation tax.
      (8)
Nothing in sub-paragraphs (3) to (5) prevents the inclusion of an amount in
20
the permitted maximum by virtue of section 228B(3) and (4).
      (9)
This paragraph does not apply in relation to any period of account later than
a period of account for which the permitted maximum has been determined
in accordance with sub-paragraph (3) to (5).
3     (1)
This paragraph applies where—
25
(a)
the existing leaseback terminates, and
(b)
in the period of account immediately following that in which it
terminates, paragraph 2(2)(b) or 2(3)(b) would apply were it not for
the termination.
      (2)
The permitted maximum for the period of account in which the leaseback
30
terminates shall also include an amount equal to the amount that the
unrelieved portion of the lessee’s excess rentals would have been in the
period of account immediately following.
Section 228C
4
Section 228C shall not apply where the existing leaseback terminates before
35
17 March 2004.
5     (1)
Section 228C applies subject to this paragraph where—
(a)
the existing leaseback terminates otherwise than by expiry of its
term, and
(b)
the amount calculated in accordance with section 228C(3) exceeds
40
the relevant cap.
      (2)
In determining the amount by which income or profits are to be increased
under section 228C(2), the amount calculated in accordance with section
228C(3) shall be disregarded to the extent that it exceeds the relevant cap.
      (3)
The relevant cap is—
45

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Schedule 23 — Finance leasebacks: transitional provision
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where—

“Original Consideration” has the same meaning as in section 228B;

“Relevant Rentals” means—
(a)
the pre-commencement rentals, minus
(b)
the total of—
5
(i)
finance charges shown in the accounts for periods that
end before 17 March 2004, and
(ii)
the appropriate proportion of finance charges shown in
the accounts for the transitional period of account;

“Net Consideration” has the same meaning as in section 228C.
10
6     (1)
This paragraph applies if—
(a)
the existing leaseback terminates otherwise than by expiry of its
term,
(b)
upon the termination of the leaseback, or during the period of one
month beginning with the date of termination, the lessee becomes
15
the owner of the plant of machinery by acquiring it—
(i)
from the lessor, or
(ii)
where no person other than the lessor or a person connected
with the lessee has owned the plant or machinery at any time
since the termination of the leaseback, from a person
20
connected with the lessee,
(c)
the person who first acquires the plant or machinery from the lessor
does so as a result of incurring capital expenditure equal (at least) to
the market value of the plant or machinery at the termination of the
leaseback, and
25
(d)
the amount of the lessee acquisition expenditure that counts as
qualifying expenditure is restricted under section 226.
      (2)
If the section 226 restriction is greater than the amount calculated in
accordance with section 228C(3)—
(a)
section 228C(2) to (4) shall not apply, but
30
(b)
if there is a taxable disposal, section 228C(2) to (4) shall apply subject
to sub-paragraph (5).
      (3)
If the section 226 restriction is not greater than the amount calculated in
accordance with section 228C(3)—
(a)
the amount by which profits or income are increased in accordance
35
with section 228C(2) shall be reduced by the section 226 restriction,
and
(b)
if there is a taxable disposal, section 228C(2) to (4) shall apply again
subject to sub-paragraph (5).
      (4)
For the purposes of sub-paragraphs (2) and (3) there is a taxable disposal if,
40
during the period of six years beginning with the date of termination of the
leaseback—
(a)
the whole of the plant or machinery is the subject of a disposal event
(within the meaning of Part 2), or
(b)
part of the plant or machinery is the subject of such a disposal event.
45
      (5)
Where section 228C(2) to (4) applies subject to this sub-paragraph—
(a)
a reference to the termination shall be treated as a reference to the
cessation of ownership of the plant or machinery, and

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(b)
the amount by which profits or income are increased in accordance
with section 228C(2) shall be—
(i)
in a case falling within sub-paragraph (2)(b), the relevant
fraction of the amount calculated in accordance with section
228C(3), or
5
(ii)
in a case falling within sub-paragraph (3)(b), the relevant
fraction of the section 226 restriction.
      (6)
In sub-paragraph (5)(b)(i) and (ii) “relevant fraction” means—

where “Disposal Proceeds” means the consideration due to the lessee under
the taxable disposal or, if higher, the market value of the plant or machinery
10
at the time of the taxable disposal; but—
(a)
where that amount is greater than the lessee acquisition expenditure,
the Disposal Proceeds shall be the amount of the lessee acquisition
expenditure, or
(b)
where that amount is less than the restricted qualifying expenditure,
15
the Disposal Proceeds shall be the amount of the restricted
qualifying expenditure.
      (7)
Where there is a taxable disposal by virtue of sub-paragraph (4)(b), this
paragraph applies in relation to that disposal with the following
modifications—
20
(a)
references in sub-paragraphs (5)(a) and (6) to the plant or machinery
shall be taken to be references to the part of the plant or machinery
comprised in the taxable disposal;
(b)
the amount by which profits or income are to be increased by virtue
of sub-paragraph (5)(b) shall be the partial disposal fraction of the
25
amount given by sub-paragraph (5)(b)(i) or (ii);
(c)
the partial disposal fraction of the restricted qualifying expenditure
and of the lessee acquisition expenditure shall be used for the
purposes of sub-paragraph (6) instead of those amounts of
expenditure.
30
      (8)
For the purposes of sub-paragraph (7) the partial disposal fraction is—

where “Apportioned Lessee Acquisition Expenditure” means so much of the
lessee acquisition expenditure as was attributable to the acquisition of the
part of the plant or machinery comprised in the taxable disposal.
      (9)
In this paragraph—
35
“lessee acquisition expenditure” means the capital expenditure
incurred by the lessee in acquiring the plant or machinery as
described in sub-paragraph (1)(b),
“restricted qualifying expenditure” means the qualifying expenditure
under section 226, and
40
“section 226 restriction” means—
(a)
the lessee acquisition expenditure, minus
(b)
the restricted qualifying expenditure.

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Schedule 23 — Finance leasebacks: transitional provision
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Section 228D
7     (1)
This paragraph applies if the pre-commencement rentals are greater than the
total of the actual taxed rentals for periods of account up to, but excluding,
the transitional period of account.
      (2)
Section 228D shall not apply in relation to—
5
(a)
the transitional period of account if the lessor’s excess rentals are
greater than the notional taxed rental for that period, or
(b)
a subsequent period of account if the untaxed portion of the lessor’s
excess rentals is greater than the notional taxed rental for that period.
      (3)
Section 228D is subject to sub-paragraph (4) in its application to—
10
(a)
the transitional period of account if the lessor’s excess rentals are not
greater than the notional taxed rental for that period, or
(b)
a subsequent period of account if the untaxed portion of the lessor’s
excess rentals is not greater than the notional taxed rental for that
period.
15
      (4)
The permitted threshold for that period of account is the total of—
(a)
the lessor’s excess rentals (in the case of the transitional period of
account) or the untaxed portion of the lessor’s excess rentals (in the
case of a subsequent period of account), and
(b)
the amount given by this calculation—
20

where—
“Basic Amount” means the amount calculated in accordance with
section 228D(4);
“Notional Taxed Rental” means the notional taxed rental for the
period of account in question, and
25
“Deductible Excess” means the amount included in the permitted
threshold by virtue of sub-paragraph (4)(a).
      (5)
But where, in relation to the transitional period of account, the amount given
by sub-paragraph (4) is less than the appropriate fraction of the notional
taxed rental for that period, the permitted threshold shall be that fraction of
30
that rental.
      (6)
In this paragraph—
(a)
“the lessor’s excess rentals” means—
(i)
the pre-commencement rentals, minus
(ii)
the total of the actual taxed rentals referred to in sub-
35
paragraph (1), and
(b)
“the untaxed portion of the lessor’s excess rentals”, in relation to a
period of account, means—
(i)
the lessor’s excess rentals, minus
(ii)
the total of the actual taxed rentals for periods of account
40
from and including the transitional period up to, but
excluding, the period in question.
      (7)
In this paragraph—
“actual taxed rental”, in relation to a period of account, means the
amount that should be taken into consideration in respect of
45
amounts receivable under the existing leaseback in calculating the

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lessor’s income or profits for that period of account for the purpose
of income tax or corporation tax;
“notional taxed rental”, in relation to a period of account, means the
amount that would, if section 228D did not apply, be taken into
consideration in respect of amounts receivable under the existing
5
leaseback in calculating the lessor’s income or profits for that
period of account for the purpose of income tax or corporation tax.
      (8)
Nothing in sub-paragraphs (3) to (5) prevents the inclusion of an amount in
the permitted threshold by virtue of section 228D(2).
      (9)
This paragraph does not apply in relation to any period of account later than
10
a period of account for which the permitted threshold has been determined
in accordance with sub-paragraphs (3) to (5).
8     (1)
This paragraph applies where—
(a)
the existing leaseback terminates, and
(b)
in the period of account immediately following that in which it
15
terminates, paragraph 7(2)(b) or 7(3)(b) would apply were it not for
the termination.
      (2)
The permitted threshold for the period of account in which the leaseback
terminates shall also include an amount equal to the amount that the
untaxed portion of the lessor’s excess rentals would have been in the period
20
of account immediately following.
Section 228E
9
Section 228E shall not apply where the existing leaseback terminates before
17 March 2004.
Chargeable gains
25
10    (1)
Sub-paragraph (2) applies where—
(a)
an existing leaseback is the leaseback in a lease and finance
leaseback,
(b)
the leaseback terminates,
(c)
on or after the termination there is a disposal, by the user, of the
30
whole or part of the plant and machinery subject to the leaseback,
and
(d)
a chargeable gain that accrues on that disposal (“the relevant
chargeable gain”) falls to be taken into account for the purposes of a
chargeable gains computation.
35
      (2)
The following fraction of the relevant chargeable gain shall instead be taken
into account for the purposes of the chargeable gains computation—

where—
“Net Rentals” means—
(a)
the total of the amounts deducted in calculating the user’s
40
income or profits, for the purpose of income tax or
corporation tax, in respect of amounts payable under the
leaseback, minus

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(b)
the total of the amounts shown in the user’s accounts in
respect of finance charges relating to the leaseback;
“Termination Charge” means the amount by which the user’s income
or profits are to be increased by virtue of section 228C(2) of the CAA
2001 because of the termination;
5
“Lease Premium” means the consideration relating to the leaseback
referred to in section 228F(6)(b) of the CAA 2001.
      (3)
References in this paragraph to termination of the leaseback shall be
construed in accordance with section 228H(1) of the CAA 2001.
      (4)
In this paragraph—
10
“CAA 2001” means the Capital Allowances Act 2001;
“chargeable gains computation” means the computation, for the
purposes of the TCGA 1992, of the total amount of chargeable gains
that accrue to the user in any chargeable period that ends on or after
17 March 2004;
15
“disposal” shall be construed in accordance with the TCGA 1992;
“lease and finance leaseback” has the same meaning as in section 228F
of the CAA 2001;
“TCGA 1992” means the Taxation of Chargeable Gains Act 1992;
“user” means the person who is the lessee under the leaseback.
20
Interpretation
11    (1)
In this Schedule—
“existing leaseback” means a leaseback the term of which began
before 17 March 2004;
“pre-commencement rentals”, in relation to an existing leaseback,
25
means—
(a)
any amounts payable by the lessee to the lessor under the
leaseback before 17 March 2004,
(b)
any amounts so payable on or after 17 March 2004 in respect
of a period that ends before 17 March 2004, or
30
(c)
where any amounts are so payable on or after 17 March 2004
in respect of a period which begins before that date and
ends on or after that date, the appropriate fraction of each of
those amounts;
“transitional period of account” means a period of account that
35
includes 17 March 2004.
      (2)
In this Schedule the “appropriate fraction”, in respect of an amount that
relates to a particular period, means this fraction—

where—

“Pre-commencement Period” means the number of days in the part of
40
the period that falls before 17 March 2004, and

“Whole Period” means the number of days in the whole of the period.