Finance (No.2) Bill

House of Commons

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
204

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
funding finance lease,
5
(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,
10
(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
15
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.
20
(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.
25
(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
30
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
35
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.
40
(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
45
lease is—

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

(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—
(a)
element A (see subsection (5)), and
5
(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,
(ii)
the date on which the plant or machinery is first
10
brought into use for the purposes of the qualifying
activity,

  exceeds
(b)
the aggregate amount of the reductions that fell to be made
under section 502K of ICTA or 148I of ITTOIA 2005 for
15
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,
the amount of the disposal value is found by first finding the sum
20
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
that would fall to be recognised as the present value,
25
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
it any amount payable by the person to the lessor for or in
30
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—
MLP is the amount of the minimum lease payments, and
35
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
(b)
“appropriate accounts” are accounts prepared in accordance
40
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
ignored.
45
(10)
This section is to be construed as one with section 70A.”.

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

Interpretation of provisions relating to long funding leases
7
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”
10
(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),
15
(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
20
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.
25
(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—
30
(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
35
(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
40
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
207

(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
5
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
10
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
15
(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).
25
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
30
(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.
35
(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
40
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,
45
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
208

(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—
5
(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
10
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.
15
(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
20
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
25
(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”
30
(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).
35
(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.
40
(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%
45
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
209

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
5
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—
10
(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
15
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—
20
(a)
under which a person grants to another person 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.
(3)
This subsection applies to an agreement or arrangement to the extent
25
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).
(4)
The conditions are that, for the purposes of generally accepted
30
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
(b)
the asset is plant or machinery.
35
(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
pre-commencement period.
40
(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.