Finance (No.2) Bill

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Session 2005 - 06
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Finance (No.2) Bill

Finance (No.2) Bill
Schedule 9 — Leases of plant or machinery: miscellaneous amendments
253

      (4)
In subsection (6) (definition of “lease”) after “In this section” insert “—
“long funding operating lease” means a long funding operating
lease for the purposes of Part 2 of the Capital Allowances Act
(see section 70YI(1) of that Act);”.
      (5)
The amendments made by this paragraph have effect in relation to
5
expenditure incurred on or after 1st April 2006.
Supplementary charge in respect of ring fence trades
2     (1)
Section 501A of ICTA is amended as follows.
      (2)
In subsection (5), for the word “and” at the end of paragraph (d) substitute
the following paragraph—
10
“(dd)
where the company is the lessee under a long funding
operating lease, the amount deductible in respect of
payments under the lease in computing the profits of the
lessee for the purposes of corporation tax (after first making
against any such amount any reductions falling to be made
15
by virtue of section 502K); and”.
      (3)
At the end of the section insert—
“(11)
In this section “long funding operating lease” means a long funding
operating lease for the purposes of Part 2 of the Capital Allowances
Act (see section 70YI(1) of that Act).”.
20
      (4)
The amendments made by this paragraph have effect in relation to
payments due on or after 1st April 2006.
Leased assets: special cases
3     (1)
Section 782 of ICTA is amended as follows.
      (2)
After subsection (1) (application of section to payments under certain leases)
25
insert—
“(1A)
This section does not apply to a payment if or to the extent that, in
the case of the lessee, it falls to be regarded in accordance with
Chapter 6A of Part 2 of the Capital Allowances Act as a payment
under a lease which is a long funding finance lease for the purposes
30
of that Part.”.
      (3)
The amendment made by this paragraph has effect in relation to payments
due on or after 1st April 2006.
Taxation of Chargeable Gains Act 1992
Long funding leases: deemed disposals and re-acquisitions
35
4     (1)
After section 25 of TCGA 1992 (non-residents: deemed disposals) insert—
“25A
Long funding leases of plant or machinery: deemed disposals
(1)
This section applies where plant or machinery is used for the
purpose of leasing under a long funding lease.
(2)
The lessor shall be deemed for all purposes of this Act—
40

Finance (No.2) Bill
Schedule 9 — Leases of plant or machinery: miscellaneous amendments
254

(a)
to have disposed of the plant or machinery at the
commencement of the term of the lease at the value described
in subsection (4)(a) or (b), and
(b)
to have immediately reacquired it at the same value.
(3)
The lessor shall also be deemed for all purposes of this Act—
5
(a)
to have disposed of the plant or machinery on the
termination of the lease for a consideration equal to the
termination amount, and
(b)
to have immediately reacquired it for the same consideration.
(4)
The value mentioned in subsection (2)(a) is—
10
(a)
where the lease is a long funding finance lease, an amount
equal to that which would fall to be recognised as the lessor’s
net investment in the lease if accounts were prepared in
accordance with generally accepted accounting practice on
the date on which the lessor’s net investment in the lease is
15
first recognised in the books or other financial records of the
lessor, or
(b)
where the lease is a long funding operating lease, an amount
equal to the market value of the plant or machinery at the
commencement of the term of the lease.
20
(5)
For the purposes of this section, the following expressions have the
meaning given in Chapter 6A of Part 2 of the Capital Allowances Act
(interpretation of provisions about long funding leases)—
“commencement”, in relation to the term of a lease,
“lessor”,
25
“long funding lease”,
“long funding finance lease”,
“long funding operating lease”,
“market value”,
“the term”, in relation to a lease,
30
“termination”,
“termination amount”.”
      (2)
The amendment made by this paragraph has effect where the
commencement of the term of the lease is on or after 1st April 2006.
Restriction of losses: long funding leases of plant or machinery
35
5     (1)
After section 41 of TCGA 1992 (restriction of losses by reference to capital
allowances and renewals allowances) insert—
“41A
Restriction of losses: long funding leases of plant or machinery
(1)
This section applies where a person disposes of an asset—
(a)
which includes plant or machinery which is a fixture for the
40
purposes of Chapter 6A of Part 2 of the Capital Allowances
Act, and
(b)
which he has used for the purpose of leasing under one or
more long funding leases.
(2)
In the computation of the amount of a loss accruing to the person on
45
the disposal there shall be excluded from the sums allowable as a

Finance (No.2) Bill
Schedule 9 — Leases of plant or machinery: miscellaneous amendments
255

deduction by virtue of section 38(1)(a) and (b) (acquisition and
enhancement costs) an amount determined in accordance with
subsection (3) or (4).
(3)
Where the person has used the plant or machinery for the purpose of
leasing under one long funding lease, the amount is equal to the fall
5
in value of the plant or machinery during the period of the lease.
(4)
Where the person has used the plant or machinery for the purpose of
leasing under more than one long funding lease, the amount is equal
to the sum of the fall in value of the plant or machinery during the
period of each lease.
10
(5)
In this section, references to the fall in value of plant or machinery
during the period of a lease are references to the amount (if any) by
which—
(a)
the market value of the plant or machinery at the
commencement of the term of the lease,
15
  exceeds
(b)
its market value at the termination of the lease.
(6)
For the purposes of this section, the following expressions have the
meaning given in Chapter 6A of Part 2 of the Capital Allowances Act
(interpretation of provisions about long funding leases)—
20
“commencement”, in relation to the term of a lease,
“long funding lease”,
“market value”,
“the term”, in relation to a lease,
“termination”.”
25
      (2)
The amendment made by this paragraph has effect in relation to disposals
on or after 1st April 2006.
Definition of market value
6     (1)
Section 272 of TCGA 1992 (valuation: general) is amended as follows.
      (2)
In subsection (6) (subjection to other provisions) after “subject to” insert
30
“sections 25A and 41A and”.
Finance Act 1997
Leasing arrangements
7     (1)
Schedule 12 to FA 1997 (leasing arrangements: finance leases and loans) is
amended as follows.
35
      (2)
In paragraph 2 (application of Part 1 in relation to leasing arrangements
where any of the return on investment is in the form of capital) after sub-
paragraph (1) insert—
   “(1A)
This Part of this Schedule does not apply if or to the extent that, in
the case of the current lessor, the lease falls to be regarded in
40
accordance with Chapter 6A of Part 2 of the Capital Allowances
Act 2001 as a long funding lease for the purposes of that Part.”.
      (3)
In paragraph 16 (application of Part 2 in relation to other finance leases) after

Finance (No.2) Bill
Schedule 9 — Leases of plant or machinery: miscellaneous amendments
256

sub-paragraph (1) insert—
   “(1A)
This Part of this Schedule does not apply if or to the extent that, in
the case of the current lessor, the lease falls to be regarded in
accordance with Chapter 6A of Part 2 of the Capital Allowances
Act 2001 as a long funding lease for the purposes of that Part.”.
5
      (4)
Paragraph 15 of Schedule 8 (commencement) also has effect in relation to the
amendments made by this paragraph.
Finance Act 2000
Tonnage tax: introductory
8
Schedule 22 to FA 2000 (tonnage tax) is amended as follows.
10
Meaning of “finance costs”
9     (1)
In Part 7 (the ring fence: general provisions) paragraph 63 (meaning of
finance costs) is amended as follows.
      (2)
In sub-paragraph (2), for the word “and” at the end of paragraph (d)
substitute the following paragraph—
15
“(dd)
where the tonnage tax company is the lessee under a long
funding operating lease, the amount deductible (or the total
amount that could, if there were no tonnage tax election, be
deductible) in respect of payments under the lease in
computing the profits of the lessee for the purposes of
20
corporation tax (after first making against any such amount
any reductions falling to be made by virtue of section 502K of
the Taxes Act 1988); and”.
      (3)
At the end of the paragraph insert—
    “(4)
In this paragraph “long funding operating lease” means a long
25
funding operating lease for the purposes of Part 2 of the Capital
Allowances Act (see section 70YI(1) of that Act).”.
      (4)
The amendments made by this paragraph have effect in relation to
payments due on or after 1st April 2006.
Capital allowances: ship leasing
30
10    (1)
Part 10 (the ring fence: capital allowances: ship leasing) is amended as
follows.
      (2)
In paragraph 89 (introduction), in sub-paragraph (1), after the paragraph
relating to paragraphs 90 and 91 (defeased leasing) insert—

“paragraphs 91A to 91F (long funding leases),”.
35
      (3)
After paragraph 91 (defeased leasing: excepted forms of security) insert—
“Long funding leases: conditions for alternative treatment
91A   (1)
This paragraph applies if the lease would fall to be regarded as a
long funding lease for the purposes of Part 2 of the Capital
Allowances Act 2001, apart from this paragraph.
40

Finance (No.2) Bill
Schedule 9 — Leases of plant or machinery: miscellaneous amendments
257

      (2)
The lease is to be treated for tax purposes as not being a long
funding lease at any time when the lease—
(a)
meets the conditions in sub-paragraph (3), or
(b)
is expected to meet those conditions when the ship is first
brought into use under the lease,
5

but this is subject to the qualification in sub-paragraph (4) and the
exception in sub-paragraph (5).
      (3)
The conditions are—
(a)
that the lease falls within paragraph 91B (lease to tonnage
tax company or group),
10
(b)
that the lease falls within paragraph 91C (tonnage tax
company to operate and manage qualifying ship),
(c)
that the lease falls within paragraph 91D (period and rate
of sublease of qualifying ship).
      (4)
The condition in paragraph (c) of sub-paragraph (3) has to be met,
15
or be expected to be met, only at times when the company within
tonnage tax is leasing the ship to a company not within tonnage
tax.
      (5)
The conditions in paragraphs (b) and (c) of sub-paragraph (3) do
not have to be met, or be expected to be met, if the lease was
20
finalised (within the meaning of Part 4 of Schedule 8 to the Finance
Act 2006) before 1st April 2006.
      (6)
Sub-paragraph (2) is subject to paragraph 91E (anti-avoidance).
Lease to tonnage tax company or group
91B   (1)
A lease falls within this paragraph if—
25
(a)
it is a lease of a qualifying ship provided directly to a
company within tonnage tax, or
(b)
it is a lease of a qualifying ship provided indirectly to a
company within tonnage tax (“T”) and sub-paragraph (2)
applies.
30
      (2)
This sub-paragraph applies where—
(a)
the owner of the qualifying ship provides it directly to a
company (“C”) under a lease,
(b)
C provides the qualifying ship directly to T under a lease,
and
35
(c)
C and T are in the same group.
Tonnage tax company to operate and manage qualifying ship
91C   (1)
A lease of a qualifying ship provided, directly or indirectly, to a
company within tonnage tax (“T”) falls within this paragraph if T
is responsible—
40
(a)
for the operation of the ship, including the appointment of
the master and those members of the crew engaged in
navigation, and
(b)
for defraying all expenses in connection with the ship, or
substantially all such expenses other than those directly
45
incidental to a particular voyage or to the employment of

Finance (No.2) Bill
Schedule 9 — Leases of plant or machinery: miscellaneous amendments
258

the ship during any period for which the ship is leased by
T to another person.
      (2)
For the purposes of this paragraph, T is “responsible” if—
(a)
he is responsible as principal, or
(b)
he appoints another person (“P”) to be responsible in his
5
place and the condition in sub-paragraph (3) is met.
      (3)
The condition is that—
(a)
P is not a person to whom the ship is leased by T and is not
connected with such a person, or
(b)
P is a company within tonnage tax.
10
      (4)
Any reference in this paragraph to a lease by T includes a reference
to a contract of affreightment entered into by T that provides for
the carriage of goods by the qualifying ship.
      (5)
Section 839 of the Taxes Act 1988 (connected persons) applies for
the purposes of this paragraph.
15
Period and rate of sublease of qualifying ship
91D   (1)
A lease of a qualifying ship provided, directly or indirectly, to a
company within tonnage tax (“T”) falls within this paragraph if
each lease of the ship by T (a “sublease”) to a company not within
tonnage tax meets the conditions in sub-paragraph (2).
20
      (2)
The conditions are—
(a)
that the amount payable under the sublease is the market
rate, and
(b)
that the period of the sublease does not exceed 7 years.
      (3)
For the purposes of this paragraph the market rate is the rate at
25
which the qualifying ship could reasonably be expected to be
leased, taking into account all the circumstances of the lease
including the period of the lease, the date at which the lease
commences and the size and description of the qualifying ship.
      (4)
For the purposes of this paragraph the period of a sublease is the
30
period comprising—
(a)
the term specified in the sublease, and
(b)
any subsequent periods which meet the conditions in sub-
paragraph (5).
      (5)
The conditions are that—
35
(a)
there is an option to continue the sublease for that period,
and
(b)
the amount payable under the sublease for that period is
not the market rate applicable at the start of that period.
      (6)
Where—
40
(a)
an option to continue a sublease for a period is exercised,
and
(b)
the amount payable under the sublease for that period is
the market rate applicable at the start of that period,

Finance (No.2) Bill
Schedule 9 — Leases of plant or machinery: miscellaneous amendments
259


the parties to the sublease are to be treated for the purposes of this
paragraph as if the sublease had terminated immediately before
the commencement of the period and a new sublease had
immediately been entered into.
      (7)
Where a sublease is for an indefinite period, the period of the
5
sublease is to be taken for the purposes of this paragraph to be a
period of more than 7 years, unless the condition in sub-paragraph
(8) is met.
      (8)
The condition is that—
(a)
the amount payable under the sublease must be reviewed
10
at least once every 7 years, and
(b)
if the amount payable under the sublease is found on such
a review not to be the market rate applicable at the time of
the review, it must be changed to the market rate
applicable at that time.
15
      (9)
Where there is an option to continue a sublease for an indefinite
period, the period of the sublease is to be taken for the purposes of
this paragraph to be a period of more than 7 years, unless the
condition in sub-paragraph (10) is met.
     (10)
The condition is that the amount payable under the sublease for
20
any period for which the option may be exercised is the market
rate applicable at the start of that period, except that—
(a)
the amount for the time being payable under the sublease
may subsequently be changed at any time to the market
rate applicable at that time,
25
(b)
the amount payable under the sublease must be reviewed
at least once every 7 years, and
(c)
if the amount payable under the sublease is found on such
a review not to be the market rate applicable at the time of
the review, it must be changed to the market rate
30
applicable at that time.
     (11)
Any reference in this paragraph to a lease by T includes a reference
to a contract of affreightment entered into by T that provides for
the carriage of goods by the qualifying ship.
Anti-avoidance
35
91E
Paragraph 91A(2) does not have effect in the case of the lease if the
main purpose, or one of the main purposes—
(a)
of the leasing of the ship,
(b)
of a series of transactions of which the leasing of the ship is
one, or
40
(c)
of any of the transactions in such a series,

was to obtain a writing down allowance determined without
regard to any of paragraphs 90, 92 and 94 to 102 in respect of
expenditure incurred by any person on the provision of the ship.