Finance (No.2) Bill

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Session 2005 - 06
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Finance (No.2) Bill

Finance (No.2) Bill
Schedule 8 — Long funding leases of plant or machinery
Part 1 — Capital allowances
205

Interpretation of provisions relating to long funding leases
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In Part 2, after Chapter 6 insert—
“Chapter 6A
Interpretation of provisions about long funding leases
Introductory
5
70F
Introductory

This Chapter makes provision for the interpretation of this Part so far
as relating to long funding leases.
Meaning of “long funding lease” etc
70G
“Long funding lease”
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(1)
A “long funding lease” is a funding lease (see section 70J) which
meets the following conditions—
(a)
it is not a short lease (see section 70I),
(b)
it is not an excluded lease of background plant or machinery
for a building (see section 70R),
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(c)
it not excluded by section 70U (plant or machinery leased
with land: low percentage value).
(2)
Where, at the commencement of the term of a plant or machinery
lease, the plant or machinery—
(a)
is not being used for the purposes of a qualifying activity
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carried on by the person concerned, but
(b)
subsequently begins to be used for the purposes of a
qualifying activity carried on by that person,

the plant or machinery lease is a long funding lease if the condition
in subsection (3) is met.
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(3)
The condition is that (apart from section 70H) the plant or machinery
lease would have been a long funding lease at its inception had the
plant or machinery been used at that time for the purposes of a
qualifying activity carried on by the person concerned.
(4)
This section is subject, in the case of the lessee, to—
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(a)
section 70H (requirement for tax return treating lease as long
funding lease);
(b)
section 70Q (leases excluded by right of lessor etc to claim
capital allowances).
(5)
See also paragraph 91A of Schedule 22 to the Finance Act 2000
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(tonnage tax: certain leases to be treated as not being long funding
leases).
70H
Lessee: requirement for tax return treating lease as long funding lease
(1)
A lease is not a long funding lease in the case of the lessee unless he
makes a tax return for the initial period on the basis that he falls to be
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taxed in respect of the lease in accordance with the provisions of—

Finance (No.2) Bill
Schedule 8 — Long funding leases of plant or machinery
Part 1 — Capital allowances
206

(a)
Chapter 5A of Part 12 of ICTA (long funding leases:
corporation tax), or
(b)
Chapter 10A of Part 2 of ITTOIA 2005 (long funding leases:
income tax).
(2)
Where, in the case of a lease, a person has made a tax return for the
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initial period—
(a)
on the basis that he falls to be taxed in respect of the lease in
accordance with those provisions, or
(b)
on the basis that he does not fall to be so taxed,

he may not make a claim for relief under the error or mistake
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provisions in respect of the tax return having been made on that
basis.
(3)
In this section—
“the error or mistake provisions” means—
(a)
section 33 of the Taxes Management Act 1970; or
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(b)
paragraph 51 of Schedule 18 to the Finance Act 1998;
“the initial period” is the first accounting period or, as the case
may be, tax year in which there is a difference in the amount
of the profits or losses falling to be shown in the return,
according to whether the lease is a long funding lease or not;
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“tax return” means—
(a)
a company tax return under paragraph 3 of Schedule
18 to the Finance Act 1998, or
(b)
a return under section 8 of the Taxes Management Act
1970 (income tax: personal return).
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70I
“Short lease”
(1)
Construe “short lease” in accordance with this section.
(2)
A lease whose term is 5 years or less is a short lease.
(3)
Where the term of a lease is—
(a)
longer than 5 years, but
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(b)
not longer than 7 years,

the lease is a short lease if Conditions A, B and C are met.
(4)
Condition A is that the lease is one which, under generally accepted
accounting practice, falls (or would fall) to be treated as a finance
lease.
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(5)
Condition B is that—
(a)
the residual value of the plant or machinery which is implied
in the terms of the lease,
  is not more than
(b)
5% of the market value of the plant or machinery at the
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commencement of the term of the lease, as estimated at the
inception of the lease.
(6)
Condition C is that under the terms of the lease—
(a)
the total rentals falling due in the first reference year, if less
than the total rentals falling due in the second reference year,
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are no more than 10% less than those rentals, and

Finance (No.2) Bill
Schedule 8 — Long funding leases of plant or machinery
Part 1 — Capital allowances
207

(b)
the total rentals falling due in the final year or in any
reference year after the second reference year, if greater than
the total rentals falling due in the second reference year, are
no more than 10% greater than those rentals.
(7)
For the purposes of Condition C—
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(a)
the first reference year is the period of 12 months beginning
with the day next after the commencement of the term of the
lease;
(b)
the other reference years are successive periods of 12 months
each beginning on an anniversary of that day and ending
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before the last day of the term of the lease;
(c)
the final year is the period of 12 months ending with the last
day of the term of the lease;
(d)
any part of the final year, other than the last day, may
accordingly also be part of a reference year.
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(8)
In determining whether Condition C is met, exclude any variation in
the rentals that results from changes in a standard published base
rate for interest.
(9)
Where—
(a)
a person leases an asset to another (“S”) under a lease that
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would, apart from this subsection, be a short lease,
(b)
the inception of that lease is on or after 7th April 2006,
(c)
at or about the time of the inception of that lease,
arrangements are entered into for the asset to be leased to one
or more other persons under one or more other leases, and
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(d)
in the aggregate, the term of the lease to S and the terms of the
leases to such of those other persons as are connected with S
exceed 5 years,

the lease to S is not a short lease.
70J
“Funding lease”
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(1)
A “funding lease” is a plant or machinery lease (see section 70K)
which at its inception meets one or more of the following tests—
(a)
the finance lease test (see section 70N),
(b)
the lease payments test (see section 70O),
(c)
the useful economic life test (see section 70P).
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(2)
Subsection (1) is subject to the following provisions of this section.
(3)
A plant or machinery lease is not a funding lease if—
(a)
section 67 applies (plant or machinery treated as owned by
person entitled to benefit of contract, etc), and
(b)
the lease is the contract mentioned in that section.
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(4)
A plant or machinery lease is not a funding lease if—
(a)
before the commencement of the term of the lease, the lessor
has leased the plant or machinery under one or more other
plant or machinery leases,
(b)
in the aggregate, the terms of those other leases exceed 65%
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of the remaining useful economic life of the plant or

Finance (No.2) Bill
Schedule 8 — Long funding leases of plant or machinery
Part 1 — Capital allowances
208

machinery at the commencement of the term of the earliest of
them, and
(c)
none of those earlier leases was a funding lease.
(5)
For the purposes of subsection (4), all persons who were lessors of
the plant or machinery before 1st April 2006 are to be treated as if
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they were the same person as the first lessor of the plant or
machinery on or after that date.
Meaning of “plant or machinery lease”
70K
“Plant or machinery lease”
(1)
A “plant or machinery lease” is any of the following—
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(a)
any agreement or arrangement to which subsection (2)
applies,
(b)
any other agreement or arrangement, to the extent that
subsection (3) applies to it,
(c)
where plant or machinery is the subject of a sale and finance
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leaseback, as defined in section 221, the finance lease
mentioned in subsection (1)(c) of that section,

and “lease”, “lessor”, “lessee” and other related expressions are to be
construed accordingly.
(2)
This subsection applies to an agreement or arrangement—
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(a)
under which a person (the lessor) grants to another person
(the lessee) the right to use plant or machinery for a period,
and
(b)
which, in accordance with generally accepted accounting
practice, falls (or would fall) to be treated as a lease.
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(3)
This subsection applies to an agreement or arrangement to the extent
that—
(a)
in accordance with generally accepted accounting practice, it
falls (or would fall) to be treated as a lease, and
(b)
it meets the conditions in subsection (4).
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(4)
The conditions are that, for the purposes of generally accepted
accounting practice,—
(a)
the agreement or arrangement conveys, or falls (or would
fall) to be regarded as conveying, the right to use an asset,
and
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(b)
the asset is plant or machinery.
(5)
In the case of an agreement or arrangement that falls (or would fall)
within subsection (2) or (3) immediately after the commencement of
the term of the lease, the condition in subsection (2)(b) or (3)(a) (as
the case may be) is to be taken to be met as respects any time in the
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pre-commencement period.
(6)
For the purposes of subsection (5), the “pre-commencement period”
is the period that—
(a)
begins with the inception of the lease, and
(b)
ends with the commencement of the term of the lease.
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