Finance (No.2) Bill

House of Commons

Session 2005 - 06
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Other Bills before Parliament

Finance (No.2) Bill

Finance (No.2) Bill
Schedule 8 — Long funding leases of plant or machinery
Part 1 — Capital allowances
198

income which becomes payable to, or has become income of, the
person by virtue or in consequence of—
(a)
the transfer,
(b)
one or more associated operations, or
(c)
the transfer and one or more associated operations.
5
(1B)
The income which an individual has power to enjoy, as mentioned in
section 739(2), includes any income which he has power to enjoy by
virtue or in consequence of—
(a)
the transfer,
(b)
one or more associated operations, or
10
(c)
the transfer and one or more associated operations.”.
      (5)
The heading to the section accordingly becomes “Interpretation of this
Chapter”.
      (6)
The amendments made by this paragraph shall be taken to have come into
force on 5th December 2005.
15
ITTOIA 2005
Gains from contracts for life insurance etc
7     (1)
In ITTOIA 2005, section 468 (gains from contracts of life insurance etc: non-
UK resident trustees and foreign institutions) is amended as follows.
      (2)
In subsection (2) (section 740 of ICTA to apply with the modifications in
20
subsection (3) or (4))—
(a)
for “Section 740” substitute “Sections 739 and 740”,
(b)
for “prevents” substitute “prevent”,
(c)
for “applies” substitute “apply”.
      (3)
In subsection (3) (cases within subsection (1)(a)) for “section 740 applies”
25
substitute “sections 739 and 740 apply”.
      (4)
In subsection (4) (cases within subsection (1)(b)) for “section 740 applies”
substitute “sections 739 and 740 apply”.
      (5)
The amendments made by this paragraph apply in relation to gains treated
as arising on or after 5th December 2005.
30
Schedule 8
Section 81

Long funding leases of plant or machinery
Part 1
Capital allowances
Introductory
35
1
CAA 2001 is amended as follows.

Finance (No.2) Bill
Schedule 8 — Long funding leases of plant or machinery
Part 1 — Capital allowances
199

Use for other qualifying activity of plant or machinery provided for long funding leasing
2
After section 13 (use for qualifying activity of plant or machinery provided
for other purposes) insert—
“13A
Use for other purposes of plant or machinery previously used for long
funding leasing
5
(1)
This section applies if a person who has been using plant or
machinery for the purpose of leasing it under a long funding lease
(see Chapter 6A)—
(a)
ceases to use the plant or machinery for that purpose without
ceasing to use it for the purposes of a qualifying activity
10
carried on by him, and
(b)
on the date of the cessation, owns the plant or machinery as a
result of having incurred capital expenditure on its provision
for the purposes of the qualifying activity.
(2)
The person is to be treated—
15
(a)
as having incurred capital expenditure (“notional
expenditure”) on the provision of the plant or machinery for
the purposes of the qualifying activity on the day after the
cessation,
(b)
as owning the plant or machinery as a result of having
20
incurred that expenditure, and
(c)
as if the plant or machinery on and after that day were
different plant or machinery from the plant or machinery
before that day.
(3)
The amount of the notional expenditure is an amount equal to the
25
termination amount, determined in accordance with section 70YG, in
the case of the long funding lease under which the plant or
machinery was last leased before the cessation.”.
Expenditure on plant or machinery for long funding leasing not to be qualifying expenditure
3
After section 34 insert—
30
“34A
Expenditure on plant or machinery for long funding leasing not
qualifying expenditure
Expenditure is not qualifying expenditure if it is incurred on the
provision of plant or machinery for leasing under a long funding
lease (see Chapter 6A).”.
35
General exclusions applying to certain sections
4     (1)
Section 46 is amended as follows.
      (2)
In subsection (2) (the general exclusions) in general exclusion 8—
(a)
for “Either” substitute “Any”, and
(b)
after the entry relating to section 13 insert—
40

“section 13A (use for other purposes of plant or machinery
provided for long funding leasing);”.

Finance (No.2) Bill
Schedule 8 — Long funding leases of plant or machinery
Part 1 — Capital allowances
200

Commencement of leasing under long funding lease: disposal events and disposal values
5     (1)
Section 61 (disposal events and disposal values) is amended as follows.
      (2)
In subsection (1) (disposal events) after paragraph (e) insert—
“(ee)
the plant or machinery begins to be leased under a long
funding lease (see Chapter 6A);”.
5
      (3)
In subsection (2) (disposal values) in the Table (disposal event, disposal
value) after item 5 insert—

“5A.
Commencement of the term of
An amount equal to that which

a long funding finance lease of
would fall to be recognised as

the plant or machinery.
the lessor’s net investment in

10

the lease if accounts were

prepared in accordance with

generally accepted accounting

practice on the date on which

the lessor’s net investment in

15

the lease is first recognised in

the books or other financial

records of the lessor.

5B.
Commencement of the term of
An amount equal to the market

a long funding operating lease
value of the plant or machinery

20

of the plant or machinery.
at the commencement of the

term of the lease.”.

      (4)
In item 6 in that Table (which refers to the occurrence of an event within
items 1 to 5) for “5” substitute “5B”.
Lessee under long funding lease: capital allowances, disposal events and disposal values
25
6
In Chapter 6 of Part 2 (hire-purchase etc and plant or machinery provided
by lessee) after section 70 insert—
“Lessees under long funding leases
70A
Entitlement to capital allowances
(1)
This section applies if a person carrying on a qualifying activity
30
incurs expenditure (whether or not of a capital nature) on the
provision of plant or machinery for the purposes of the qualifying
activity under a long funding lease.
(2)
In the application of this Part in the case of that person, the plant or
machinery is to be treated as owned by him at any time when he is
35
the lessee under the long funding lease.

That is so whether or not the lease also falls to be regarded as a long
funding lease in the application of this Part in the case of the lessor.
(3)
The person is to be treated for the purposes of this Part as having
incurred capital expenditure on the provision of the plant or
40
machinery as follows.

Finance (No.2) Bill
Schedule 8 — Long funding leases of plant or machinery
Part 1 — Capital allowances
201

(4)
The capital expenditure is to be treated as incurred at the
commencement of the term of the long funding lease.
(5)
The amount of the capital expenditure varies, according to whether
the long funding lease is—
(a)
a long funding operating lease (subsection (6)), or
5
(b)
a long funding finance lease (subsection (7)).
(6)
If the long funding lease is a long funding operating lease, the
amount of the capital expenditure is to be found in accordance with
section 70B.
(7)
If the long funding lease is a long funding finance lease, the amount
10
of the capital expenditure is to be found in accordance with section
70C.
(8)
See Chapter 6A for interpretation of this section.
70B
Long funding operating lease: amount of capital expenditure
(1)
This section applies by virtue of section 70A(6).
15
(2)
If the long funding lease is a long funding operating lease, the
amount of the capital expenditure is the market value of the plant or
machinery at the later of—
(a)
the commencement of the term of the lease;
(b)
the date on which the plant or machinery is first brought into
20
use for the purpose of the qualifying activity.
(3)
This section is to be construed as one with section 70A.
70C
Long funding finance lease: amount of capital expenditure
(1)
This section has effect by virtue of section 70A(7) for the purpose of
determining the amount of the capital expenditure in the case of a
25
long funding finance lease.
(2)
If the lease is one which, under generally accepted accounting
practice, falls (or would fall) to be treated as a loan, this section
applies as if the lease were one which, under generally accepted
accounting practice, fell to be treated as a finance lease.
30
(3)
The amount of the capital expenditure is the total of—
(a)
commencement PVMLP (see subsection (4)), and
(b)
if subsection (6) applies, the unrelievable pre-commencement
rentals (“UPR”),

but subject, in a case falling within subsection (7), to the restriction
35
imposed by subsection (8).
(4)
Commencement PVMLP is the amount that would fall to be
recognised as the present value, at the appropriate date, of the
minimum lease payments (see section 70YE) if appropriate accounts
were prepared by the person.
40
(5)
For the purposes of subsection (4)—
“appropriate accounts” are accounts prepared in accordance
with generally accepted accounting practice on the date on

Finance (No.2) Bill
Schedule 8 — Long funding leases of plant or machinery
Part 1 — Capital allowances
202

which that value is first recognised in the books or other
financial records of the person;
“the appropriate date” is the later of—
(a)
the commencement of the term of the lease;
(b)
the date on which the plant or machinery is first
5
brought into use for the purpose of the qualifying
activity.
(6)
This subsection applies if—
(a)
the person has paid rentals under the lease before the
commencement of the term of the lease, and
10
(b)
in the case of some or all of those rentals, relief otherwise than
by virtue of this subsection—
(i)
is not available, and
(ii)
if the case is one where the plant or machinery was
not used for the purposes of a qualifying activity in
15
the period before the commencement of the term of
the lease, would not have been available had the plant
or machinery been used in that period for the
purposes of a qualifying activity,

and in any such case UPR is the amount of the rentals for which relief
20
is not, and (in a case falling within paragraph (b)(ii)) would not have
been, so available.
(7)
Subsection (8) applies if the circumstances are such that it would not
be unreasonable to conclude from them that the purpose, or one of
the main purposes, of entering into—
25
(a)
the lease,
(b)
a series of transactions of which the lease is one, or
(c)
any of the transactions in such a series,

is to obtain allowances under this Part in respect of an amount of
capital expenditure that materially exceeds the market value of the
30
leased asset at the commencement of the term of the lease.
(8)
In any such case, the amount of the capital expenditure described in
subsection (3) is to be restricted to an amount equal to the market
value of the asset at the commencement of the term of the lease.
(9)
In this section “relief” means relief by way of—
35
(a)
an allowance under this Act,
(b)
a deduction in computing profits for the purposes of income
tax or corporation tax,
(c)
a deduction from total profits or total income for the
purposes of either of those taxes.
40
(10)
This section is to be construed as one with section 70A.
70D
Long funding finance lease: additional expenditure: allowances for
lessee
(1)
This section applies where the following conditions are met—
(a)
a person is the lessee of plant or machinery under a long
45
funding finance lease,

Finance (No.2) Bill
Schedule 8 — Long funding leases of plant or machinery
Part 1 — Capital allowances
203

(b)
as a result of section 70A, the person falls to be regarded as
having incurred qualifying expenditure on the provision of
the plant or machinery, and
(c)
the lessor incurs expenditure in relation to the plant or
machinery,
5
(d)
as a result of the lessor incurring the expenditure, there is in
the case of the lessee an increase (the “relevant increase”) in
the present value of the minimum lease payments.
(2)
If the lease is one which, under generally accepted accounting
practice, falls (or would fall) to be treated as a loan, this section
10
applies as if the lease were one which, under generally accepted
accounting practice, fell to be treated as a finance lease.
(3)
The person is to be treated for the purposes of this Part as having
incurred further capital expenditure on the provision of the plant or
machinery as follows.
15
(4)
The person is to be treated as having incurred the expenditure on the
date of first recognition.
(5)
The amount of the expenditure is the amount that would fall to be
recognised as the amount of the relevant increase if appropriate
accounts were prepared by the person.
20
(6)
For that purpose, “appropriate accounts” are accounts prepared in
accordance with generally accepted accounting practice on the date
of first recognition.
(7)
For the purposes of this section, the “date of first recognition” is the
date on which the relevant increase is first recognised in the books or
25
other financial records of the person.
(8)
This section is to be construed as one with section 70A.
70E
Disposal events and disposal values
(1)
This section applies where—
(a)
a person is the lessee of plant or machinery under a long
30
funding lease,
(b)
as a result of section 70A, the person falls to be regarded as
having incurred qualifying expenditure on the provision of
the plant or machinery, and
(c)
the lease terminates.
35
(2)
In the case of that person—
(a)
the termination of the lease is a disposal event, and
(b)
the person is required to bring into account a disposal value
for the chargeable period in which that disposal event occurs.
(3)
The amount of the disposal value varies according to whether the
40
lease is—
(a)
a long funding operating lease (see subsections (4) to (6)), or
(b)
a long funding finance lease (see subsections (7) and (8)).
(4)
If the lease is a long funding operating lease, the disposal value is the
sum of—
45

Finance (No.2) Bill
Schedule 8 — Long funding leases of plant or machinery
Part 1 — Capital allowances
204

(a)
element A (see subsection (5)), and
(b)
element B (see subsection (6)).
(5)
Element A is the amount (if any) by which—
(a)
the market value of the plant or machinery at the later of—
(i)
the commencement of the term of the lease,
5
(ii)
the date on which the plant or machinery is first
brought into use for the purpose of the qualifying
activity,

  exceeds
(b)
the aggregate amount of the reductions that fell to be made
10
under section 502K of ICTA or 148I of ITTOIA 2005 for
periods of account in which the person was the lessee.
(6)
Element B is the sum of any amounts payable to the person which are
calculated by reference to the termination value.
(7)
If, in the case of the person, the lease is a long funding finance lease,
15
the amount of the disposal value is found by first finding the sum
of—
(a)
any amounts payable to the person which are calculated by
reference to the termination value, and
(b)
if the lease terminates before the end of the term, the amount
20
that would fall to be recognised as the present value,
immediately before the termination, of the balance of the
minimum lease payments (see subsection (8)) if appropriate
accounts were prepared by the person,

and then reducing that sum (but not below nil) by subtracting from
25
it any amount payable by the person to the lessor for or in
consequence of the termination.
(8)
For the purposes of subsection (7)(b)—
(a)
the balance of the minimum lease payments is the amount by
which MLP exceeds TMLP, where—
30
MLP is the amount of the minimum lease payments, and
TMLP is the amount that would have been the
minimum lease payments if the term of the lease had
been such as to expire on the day of the termination,
and
35
(b)
“appropriate accounts” are accounts prepared in accordance
with generally accepted accounting practice immediately
before the termination of the lease.
(9)
If the termination of the lease gives rise to a disposal event in the case
of the person apart from this section, that disposal event is to be
40
ignored.
(10)
This section is to be construed as one with section 70A.”.