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 3 — Income tax
239

148B
Lessor under long funding finance lease: exceptional items
(1)
This section applies for the purpose of calculating the profits of a
person carrying on a trade for a period of account if he 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
5
or capital nature)—
(a)
arises to the person 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
10
(c)
would not, apart from this section, be brought into account in
calculating the profits of the person.
(3)
The profit or loss is to be treated—
(a)
in the case of a profit, as income of the person that is
attributable to the lease,
15
(b)
in the case of a loss, as a revenue expense incurred by the
person in connection with the lease.
(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—
20
(a)
in the person’s profit and loss account or income statement,
(b)
in the person’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 person’s profits or losses for that period.
25
148C
Lessor under long funding finance lease making termination payment
(1)
This section applies for the purpose of calculating the profits of a
person carrying on a trade for a period of account if he is or has been
the lessor under a long funding finance lease.
(2)
Where—
30
(a)
the lease terminates, and
(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
calculating the profits of the person.
35
(3)
This section does not prevent a deduction in respect of a sum to the
extent that the sum is brought into account in determining the
person’s rental earnings.
Lessors under long funding operating leases
148D
Lessor under long funding operating lease: periodic deduction
40
(1)
This section applies for the purpose of calculating the profits of a
person carrying on a trade in a period of account—
(a)
for the whole of which, or
(b)
for any part of which,

Finance (No.2) Bill
Schedule 8 — Long funding leases of plant or machinery
Part 3 — Income tax
240


the person is the lessor of any plant or machinery under a long
funding operating lease.
(2)
A deduction is allowed in calculating the profits of the person for the
period of account.
(3)
The amount of the deduction for any period of account is determined
5
as follows.
(4)
First, find the “relevant value” for the purposes of subsection (6)(a),
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
10
as a qualifying activity, cost;
(b)
if the last previous use of the plant or machinery by the lessor
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
15
was the leasing of it under a long funding finance lease as a
qualifying activity, the recognised value;
(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
20
market value;
(e)
if the lessor owns the plant or machinery as a result of having
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
25
lessor for the purposes of a qualifying activity on or
after 1st April 2006, and
(ii)
that qualifying activity is the leasing of the plant or
machinery under the long funding lease,

the relevant value is the lower of first use market value and
30
first use amortised value.
(5)
In subsection (4)—
“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
35
machinery would have at the time when it is first brought
into use for the purposes of the qualifying activity, on the
assumption that—
(a)
the cost of acquiring the plant or machinery had been
written off on a straight line basis over the remaining
40
useful economic life of the plant or machinery, and
(b)
any further capital expenditure incurred had been
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;
45
“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
purposes of the qualifying activity;

Finance (No.2) Bill
Schedule 8 — Long funding leases of plant or machinery
Part 3 — Income tax
241

“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
machinery is recognised in the books or other financial
5
records of the lessor at the commencement of the long
funding operating lease.
(6)
From—
(a)
the relevant value determined in accordance with subsection
(4),
10
  subtract
(b)
the amount which, at the commencement of the term of the
lease, is (or, in a case falling within subsection (4)(e), would
have been) expected to be the residual value of the plant or
machinery,
15

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.
(8)
The apportionment must be on a time basis according to the
20
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.
148E
Long funding operating lease: lessor’s additional expenditure
(1)
This section applies if, in a period of account,—
25
(a)
a person carrying on a trade is the lessor of any plant or
machinery under a long funding operating lease,
(b)
the person incurs capital expenditure in relation to the plant
or machinery, and
(c)
that capital expenditure (the “additional expenditure”) is not
30
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 148D(4)(e), subsection (1)(c) has effect
as if the reference to the commencement of the term of the lease were
a reference to the time when the plant or machinery is first brought
35
into use by the lessor for the purposes of the qualifying activity.
(3)
In any such case, an additional deduction is allowed in calculating
the profits of the person for each post-expenditure period of account
in which the person is the lessor of the plant or machinery under the
lease.
40
(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—
“ARV” is the amount which, at the time when the additional
expenditure is incurred, is expected to be the residual value
45
of the plant or machinery;

Finance (No.2) Bill
Schedule 8 — Long funding leases of plant or machinery
Part 3 — Income tax
242

“CRV” is the amount which, at the commencement of the term
of the lease, is expected to be the residual value of the plant
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
5
section in relation to any previous additional expenditure
incurred by the person in relation to the leased plant or
machinery;
“TRV” is the total of CRV and PRV.
(6)
Find RRV, where—
10
(a)
if ARV exceeds CRV, RRV is the portion of the excess that is
a result of the additional expenditure, but
(b)
if ARV does not exceed CRV, RRV is nil.
(7)
From—
(a)
the amount of the additional expenditure,
15
  subtract
(b)
RRV,

to find the expected partial reduction in value over the remainder of
the term of the lease.
(8)
Apportion the amount of that expected partial reduction in value to
20
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
period of account.
25
(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
expenditure.
30
148F
Lessor under long funding operating lease: termination of lease
(1)
This section applies for the purpose of calculating the profits of a
person carrying on a trade in a period of account if—
(a)
a long funding operating lease terminates in that period of
account, and
35
(b)
the person is the lessor under that lease immediately before
the termination.
(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
40
reference to the termination value (LP).
(3)
Step 2 is to find—
(a)
the relevant value for the purposes of section 148D(a) (RV);
(b)
the total of the deductions allowable under section 148D for
periods of account for the whole or part of which the person
45
was the lessor before the termination of the lease (TD1);

Finance (No.2) Bill
Schedule 8 — Long funding leases of plant or machinery
Part 3 — Income tax
243

(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 person which constitute additional expenditure for the
purposes of section 148E in the case of the lease (TAE);
5
(b)
the total of any deductions allowable under section 148E for
periods of account for the whole or part of which the person
was the lessor before the termination of the lease (TD2);
(c)
the amount, if any, (EAE) by which TAE exceeds TD2.
(5)
Step 4 is to find the total of ERV and EAE (T).
10
(6)
If (TA - LP) exceeds T, treat a profit of an amount equal to the excess
as arising to the person 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
arising to the person in that period of account.
15
(8)
A profit or loss treated as arising to the person under subsection (6)
or (7) is to be treated—
(a)
in the case of a profit, as income of the person attributable to
the lease,
(b)
in the case of a loss, as a revenue expense incurred by the
20
person in connection with the lease.
(9)
In calculating the profits of the person for the period, no deduction is
allowed in respect of any sums paid to the lessee that are calculated
by reference to the termination value.
Lessees under long funding finance leases
25
148G
Lessee under long funding finance lease: limit on deductions
(1)
This section applies for the purpose of calculating the profits of a
person carrying on a trade, profession or vocation for a period of
account in which the person is the lessee of any plant or machinery
under a long funding finance lease.
30
(2)
In calculating the person’s profits for the period of account,—
(a)
the amount deducted in respect of amounts payable under
the lease,
  must not exceed
(b)
the amounts which, in accordance with generally accepted
35
accounting practice, fall (or would fall) to be shown in the
person’s accounts as finance charges in respect of the lease.
(3)
If the lease is one which, under generally accepted accounting
practice, falls (or would fall) to be treated as a loan, subsection (2)
applies as if the lease were one which, under generally accepted
40
accounting practice, fell to be treated as a finance lease.
148H
Lessee under long funding finance lease: termination
(1)
This section applies where—
(a)
a person carrying on a trade, profession or vocation is or has
been the lessee under a long funding finance lease, and
45

Finance (No.2) Bill
Schedule 8 — Long funding leases of plant or machinery
Part 3 — Income tax
244

(b)
in connection with the termination of the lease, a payment
calculated by reference to the termination value falls to be
made to the person.
(2)
The payment is not to be brought into account in calculating the
profits of the person for any period of account.
5
(3)
Subsection (2) does not affect the amount of any disposal value that
falls to be brought into account by the person under CAA 2001.
Lessees under long funding operating leases
148I
Lessee under long funding operating lease
(1)
This section applies for the purpose of calculating the profits of a
10
person carrying on a trade, profession or vocation for a period of
account in which the person is the lessee of any plant or machinery
under a long funding operating lease.
(2)
The deductions that may be allowed in calculating the profits of the
person for the period of account are to be reduced in accordance with
15
the following provisions of this section.
(3)
The amount of the reduction for any period of account is to be
determined as follows.
(4)
First, find the “relevant value” for the purposes of subsection (6)(a),
which is—
20
(a)
the market value of the plant or machinery at the
commencement of the term of the lease, unless paragraph (b)
applies;
(b)
if the lessee—
(i)
owns the plant or machinery as a result of having
25
incurred expenditure on its provision for purposes
other than those of a qualifying activity, but
(ii)
brings the plant or machinery into use for the
purposes of a qualifying activity on or after 1st April
2006,
30

the lower of first use market value and first use amortised
market value.
(5)
In subsection (4)—
“first use amortised market value” means the value that the
plant or machinery would have—
35
(a)
at the time when it is first brought into use for the
purposes of the qualifying activity, but
(b)
on the assumption that the market value of the plant
or machinery at the commencement of the term of the
lease had been written off on a straight line basis over
40
the remaining useful economic life of the plant or
machinery;
“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
purposes of the qualifying activity.
45
(6)
From—

Finance (No.2) Bill
Schedule 8 — Long funding leases of plant or machinery
Part 3 — Income tax
245

(a)
the relevant value determined in accordance with subsection
(4),
  subtract
(b)
the amount which, at the commencement of the term of the
lease, is (or, in a case falling within subsection (4)(b), would
5
have been) expected to be the market value of the plant or
machinery at the end of the term of the lease,

to find the expected gross reduction over the term of the lease.
(7)
Apportion the amount of that expected gross reduction to each
period of account in which any part of the term of the lease falls.
10
(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 reduction for any period of account is the amount
so apportioned to that period.
Interpretation of this Chapter
15
148J
Interpretation of Chapter 10A
(1)
This section has effect for the interpretation of this Chapter.
(2)
In this Chapter—
“qualifying activity” has the same meaning as in Part 2 of CAA
2001;
20
“residual value”, in relation to any plant or machinery leased
under a long funding operating lease, means—
(a)
the estimated market value of the plant or machinery
on a disposal at the end of the term of the lease,
  less
25
(b)
the estimated costs of that disposal.
(3)
Any reference in this Chapter to a sum being written off on a straight
line basis over a period of time (the “writing-off period”) is a
reference to—
(a)
the sum being apportioned between each of the periods of
30
account in which any part of the writing-off period falls,
(b)
that apportionment being made on a time basis, according to
the proportion of the writing-off period that falls in each of
the periods of account, and
(c)
the sum being written off accordingly.
35
(4)
Chapter 6A of Part 2 of CAA 2001 (interpretation of that Part so far
as relating to long funding leases) also applies for the purposes of
this Chapter.”.
Application of Chapter 10A for calculating the profits of a property business
14    (1)
Section 272 of ITTOIA 2005 is amended as follows.
40
      (2)
In the Table in subsection (2), insert at the appropriate place—