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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

227

 

“remaining useful economic life”, in the case of any leased plant

or machinery, is the period—

(a)   

beginning with the commencement of the term of the

lease, and

(b)   

ending when the asset is no longer used, and no

5

longer likely to be used, by any person for any

purpose as a fixed asset of a business;

“short lease” is to be construed in accordance with section 70I;

“the term”, in relation to a lease, is to be construed in accordance

with section 70YF (but see also section 70YC(5) (extension, for

10

certain purposes, of term of lease that is not a long funding

lease));

“termination”, in relation to a lease,—

(a)   

means the coming to an end of the lease, whether by

effluxion of time or in any other way, and

15

(b)   

includes in particular the bringing to an end of the

lease by any person or by operation of law,

and related expressions are to be construed accordingly;

“termination amount” is to be construed in accordance with

section 70YG;

20

“termination value” is to be construed in accordance with

section 70YH.

(2)   

The market value of any plant or machinery at any time is to be

determined on the assumption of a disposal by an absolute owner

free from all leases and other encumbrances.

25

(3)   

In relation to a lease, any reference to plant or machinery includes a

reference to fixtures.

(4)   

Section 839 of ICTA (connected persons) applies.

(5)   

Any necessary apportionments under or by virtue of this Chapter are

to be made on a just and reasonable basis.

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70YJ    

Power to vary the meaning of certain expressions

(1)   

The Treasury may by regulations make provision amending this

Chapter so as to vary—

(a)   

the meaning of “plant or machinery lease”, or

(b)   

the finance lease test.

35

(2)   

A statutory instrument containing regulations under this section is

not to be made unless a draft of the instrument has been laid before,

and approved by a resolution of, the House of Commons.”.

Cases in which short-life asset treatment is ruled out

8     (1)  

The Table in section 84 is amended as follows.

40

 

 

Finance (No.2) Bill
Schedule 8 — Long funding leases of plant or machinery
Part 2 — Corporation tax

228

 

      (2)  

In paragraph 1 after sub-paragraph (a) insert—

  

(aa)

section 13A (use for other

  
   

purposes of plant or

  
   

machinery provided for

  
   

long funding leasing), or

  

5

Fixtures

9     (1)  

In section 172 (scope of Chapter 14 of Part 2 (fixtures)) after subsection (2)

insert—

“(2A)   

Subsections (1) and (2) are subject to section 172A.”.

      (2)  

After section 172 insert—

10

“172A   

Long funding leases etc: cases where this Chapter does not apply.

(1)   

This section applies where plant or machinery that is or becomes a

fixture is the subject of a long funding lease (see Chapter 6A).

(2)   

This section also applies if, in any such case,—

(a)   

the lessee under the long funding lease is or becomes the

15

lessor of some or all of the plant or machinery under a further

lease, and

(b)   

the further lease is not itself a long funding lease within

subsection (1).

(3)   

This Chapter does not apply to determine the entitlement of the

20

lessor or the lessee (under either lease) to allowances under this Part

in respect of expenditure on the plant or machinery.

(4)   

This Chapter does not apply to determine whether the lessor or the

lessee (under either lease) is to be treated as the owner of the plant or

machinery.”.

25

Part 2

Corporation tax

Introductory

10         

ICTA is amended as follows.

Special rules for long funding leases

30

11         

In Part 12 (special classes of companies and businesses) after section 502

 

 

Finance (No.2) Bill
Schedule 8 — Long funding leases of plant or machinery
Part 2 — Corporation tax

229

 

insert the following Chapter—

“Chapter 5A

Special rules for long funding leases of plant or machinery: corporation tax

Introductory

“502A   

  Scope of Chapter 5A

5

   

This Chapter has effect for the purposes of corporation tax only.

Lessors under long funding finance leases

502B    

Lessor under long funding finance lease: rental earnings

(1)   

This section applies for determining for the purposes of corporation

tax the profits of a company for any period of account in which it is

10

the lessor of any plant or machinery under a long funding finance

lease.

(2)   

The amount to be brought into account as the lessor’s taxable income

from the lease for the period of account is the amount of the rental

earnings in respect of the lease for the period of account.

15

(3)   

The “rental earnings” for any period is the amount which, in

accordance with generally accepted accounting practice, falls (or

would fall) to be treated as the gross return on investment for that

period in respect of the lease where it meets the finance lease test.

(4)   

If the lease is one which, under generally accepted accounting

20

practice, falls (or would fall) to be treated as a loan in the accounts in

question, so much of the rentals under the lease as fall (or would fall)

to be treated as interest are to be treated for the purposes of this

section as rental earnings.

502C    

Lessor under long funding finance lease: exceptional items

25

(1)   

This section applies for determining for the purposes of corporation

tax the profits of a company which is or has been the lessor under a

long funding finance lease.

(2)   

This section has effect where a profit or loss (whether of an income

or capital nature)—

30

(a)   

arises to the company in connection with the lease, and

(b)   

in accordance with generally accepted accounting practice

falls to be recognised for accounting purposes in a period of

account, but

(c)   

would not, apart from this section, be brought into account in

35

computing the profits of the company for the purposes of

corporation tax.

(3)   

The profit or loss is to be treated—

(a)   

in the case of a profit, as income of the company attributable

to the lease,

40

(b)   

in the case of a loss, as a revenue expense incurred by the

company in connection with the lease.

 

 

Finance (No.2) Bill
Schedule 8 — Long funding leases of plant or machinery
Part 2 — Corporation tax

230

 

(4)   

Any reference in this section to an amount falling to be recognised

for accounting purposes in a period of account is a reference to an

amount falling to be recognised for accounting purposes—

(a)   

in the company’s profit and loss account or income

statement,

5

(b)   

in the company’s statement of recognised gains and losses or

statement of changes in equity, or

(c)   

in any other statement of items brought into account in

computing the company’s profits or losses for that period.

502D    

Lessor under long funding finance lease making termination payment

10

(1)   

This section applies for determining the liability to corporation tax of

a company which is or has been the lessor under a long funding

finance lease.

(2)   

Where—

(a)   

the lease terminates, and

15

(b)   

a sum calculated by reference to the termination value is paid

to the lessee,

   

no deduction in respect of the sum paid to the lessee is allowed in

computing the profits of the company.

(3)   

This section does not prevent a deduction in respect of a sum to the

20

extent that the sum is brought into account in determining the

company’s rental earnings.

Lessors under long funding operating leases

502E    

Lessor under long funding operating lease: periodic deduction

(1)   

This section applies for determining for the purposes of corporation

25

tax the profits of a company for any period of account—

(a)   

for the whole of which, or

(b)   

for any part of which,

   

the company is the lessor of any plant or machinery under a long

funding operating lease.

30

(2)   

A deduction is allowed in computing the profits of the company for

the period of account.

(3)   

The amount of the deduction for any period of account is to be

determined as follows.

(4)   

First, find the “relevant value” for the purposes of subsection (6)(a)

35

below, which is—

(a)   

if the only use of the plant or machinery by the lessor has

been the leasing of it under the long funding operating lease

as a qualifying activity, cost;

(b)   

if the last previous use of the plant or machinery by the lessor

40

was the leasing of it under another long funding operating

lease as a qualifying activity, market value;

(c)   

if the last previous use of the plant or machinery by the lessor

was the leasing of it under a long funding finance lease as a

qualifying activity, the recognised value;

45

 

 

Finance (No.2) Bill
Schedule 8 — Long funding leases of plant or machinery
Part 2 — Corporation tax

231

 

(d)   

if the last previous use of the plant or machinery by the lessor

was for the purposes of a qualifying activity other than

leasing under a long funding lease, the lower of cost and

market value;

(e)   

if the lessor owns the plant or machinery as a result of having

5

incurred expenditure on its provision for purposes other than

those of a qualifying activity, but—

(i)   

the plant or machinery is brought into use by the

lessor for the purposes of a qualifying activity on or

after 1st April 2006, and

10

(ii)   

that qualifying activity is the leasing of the plant or

machinery under the long funding operating lease,

   

the relevant value is the lower of first use market value and

first use amortised value.

(5)   

In subsection (4) above—

15

“cost” means the amount of the expenditure incurred by the

lessor on the provision of the plant or machinery;

“first use amortised value” means the value that the plant or

machinery would have at the time when it is first brought

into use for the purposes of the qualifying activity, on the

20

assumption that—

(a)   

the cost of acquiring the plant or machinery had been

written off on a straight line basis over the remaining

useful economic life of the plant or machinery, and

(b)   

any further capital expenditure incurred had been

25

written off on a straight line basis over so much of the

remaining economic life of the plant or machinery as

remains at the time when the expenditure is incurred;

“first use market value” means the market value of the plant or

machinery at the time when it is first brought into use for the

30

purposes of the qualifying activity;

“market value” means the market value of the plant or

machinery at the commencement of the term of the long

funding operating lease;

“recognised value” means the value at which the plant or

35

machinery is recognised in the books or other financial

records of the lessor at the commencement of the long

funding operating lease.

(6)   

From—

(a)   

the relevant value determined in accordance with subsection

40

(4) above,

  subtract

(b)   

the amount which, at the commencement of the term of the

lease, is (or, in a case falling within subsection (4)(e) above,

would have been) expected to be the residual value of the

45

plant or machinery,

   

to find the expected gross reduction in value over the term of the

lease.

(7)   

Apportion the amount of that expected gross reduction in value to

each period of account in which any part of the term of the lease falls.

50

 

 

Finance (No.2) Bill
Schedule 8 — Long funding leases of plant or machinery
Part 2 — Corporation tax

232

 

(8)   

The apportionment must be on a time basis according to the

proportion of the term of the lease that falls in each period of account.

(9)   

The amount of the deduction for any period of account is the amount

so apportioned to that period.

502F    

Long funding operating lease: lessor’s additional expenditure

5

(1)   

This section applies if in any period of account—

(a)   

a company is the lessor of any plant or machinery under a

long funding operating lease,

(b)   

the company incurs capital expenditure in relation to the

plant or machinery, and

10

(c)   

that capital expenditure (the “additional expenditure”) is not

reflected in the market value of the plant or machinery at the

commencement of the term of the lease.

(2)   

In a case falling within section 502E(4)(e) above, subsection (1)(c)

above has effect as if the reference to the commencement of the term

15

of the lease were a reference to the time when the plant or machinery

is first brought into use by the lessor for the purposes of the

qualifying activity.

(3)   

Where this section applies, an additional deduction is allowed in

computing the profits of the company for each post-expenditure

20

period of account in which the company is the lessor of the plant or

machinery under the lease.

(4)   

The amount of the deduction for any such period of account is to be

determined as follows.

(5)   

Find ARV, CRV, PRV, and TRV where—

25

“ARV” is the amount which, at the time when the additional

expenditure is incurred, is expected to be the residual value

of the plant or machinery;

“CRV” is the amount which, at the commencement of the term

of the lease, is expected to be the residual value of the plant

30

or machinery;

“PRV” is the sum of any amounts that fell to be taken into

account as RRV (see subsection (6)) in the application of this

section in relation to any previous additional expenditure

incurred by the company in relation to the leased plant or

35

machinery;

“TRV” is the total of CRV and PRV.

(6)   

Find RRV, where—

(a)   

if ARV exceeds TRV, RRV is the portion of the excess that is

a result of the additional expenditure, but

40

(b)   

if ARV does not exceed TRV, RRV is nil.

(7)   

From—

(a)   

the amount of the additional expenditure,

  subtract

(b)   

RRV,

45

   

to find the expected partial reduction in value over the remainder of

the term of the lease.

 

 

Finance (No.2) Bill
Schedule 8 — Long funding leases of plant or machinery
Part 2 — Corporation tax

233

 

(8)   

Apportion the amount of that expected partial reduction in value to

each post-expenditure period of account in which any part of the

term of the lease falls.

(9)   

The apportionment must be on a time basis according to the

proportion of the term of the lease that falls in each post-expenditure

5

period of account.

(10)   

The amount of the additional deduction for any period of account is

the amount so apportioned to that period.

(11)   

In this section “post-expenditure period of account” means any

period of account ending after the incurring of the additional

10

expenditure.

502G    

Lessor under long funding operating lease: termination of lease

(1)   

This section applies for determining the liability to corporation tax of

a company which is the lessor immediately before the termination of

a long funding operating lease.

15

(2)   

Step 1 is to find—

(a)   

the termination amount (TA);

(b)   

the total of any sums paid to the lessee that are calculated by

reference to the termination value (LP).

(3)   

Step 2 is to find—

20

(a)   

the relevant value for the purposes of section 502E(6)(a) (RV);

(b)   

the total of the deductions allowable under section 502E for

periods of account for the whole or part of which the

company was the lessor before the termination of the lease

(TD1);

25

(c)   

the amount, if any, (ERV) by which RV exceeds TD1.

(4)   

Step 3 is to find—

(a)   

the total of any amounts of capital expenditure incurred by

the company which constitute additional expenditure for the

purposes of section 502F in the case of the lease (TAE);

30

(b)   

the total of any deductions allowable under section 502F for

periods of account for the whole or part of which the

company was the lessor before the termination of the lease

(TD2);

(c)   

the amount, if any, (EAE) by which TAE exceeds TD2.

35

(5)   

Step 4 is to find the total of ERV and EAE (T).

(6)   

If (TA - LP) exceeds T, treat a profit of an amount equal to the excess

as arising to the company in the period of account in which the lease

terminates.

(7)   

If T exceeds (TA - LP), treat a loss of an amount equal to the excess as

40

arising to the company in that period of account.

(8)   

A profit or loss treated as arising to the company under subsection

(6) or (7) above is to be treated—

(a)   

in the case of a profit, as income of the company attributable

to the lease,

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