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
210

70L
Plant or machinery leased with other assets: separate derived leases
(1)
This section applies in any case where an agreement or arrangement
(the “mixed lease”) at any time relates, or is to relate, or has come to
relate, to both—
(a)
plant or machinery of any particular description (the
5
“relevant plant or machinery”), and
(b)
other assets (whether or not also plant or machinery).
(2)
A mixed lease is an “eligible mixed lease” if—
(a)
under generally accepted accounting practice, it falls (or
would fall) to be treated as a lease, or
10
(b)
the relevant plant or machinery is the subject of a sale and
finance leaseback, as defined in section 221, and the mixed
lease is or includes the finance lease mentioned in subsection
(1)(c) of that section.
(3)
In the case of an agreement or arrangement that falls (or would fall)
15
within paragraph (a) of subsection (2) immediately after the
commencement of the term of the lease, the condition in that
paragraph is to be taken to be met as respects any time in the pre-
commencement period.
(4)
For the purposes of subsection (3), the “pre-commencement period”
20
is the period that—
(a)
begins with the inception of the lease, and
(b)
ends with the commencement of the term of the lease.
(5)
Where this section applies—
(a)
the eligible mixed lease, so far as relating to the relevant plant
25
or machinery, and
(b)
the eligible mixed lease, so far as relating to other assets,

shall be treated for the purposes of this Part (other than this section)
as if they were separate agreements or arrangements.
(6)
Any such notional separate agreement or arrangement is referred to
30
in this Part as a “derived lease”.
(7)
Section 70M makes further provision with respect to derived leases
of plant or machinery.
70M
Derived leases of plant or machinery: term and rentals
(1)
This section has effect in any case where, as a result of applying
35
section 70L, there is a derived lease of the relevant plant or
machinery.
(2)
This section makes provision with respect to—
(a)
determining whether the derived lease is a plant or
machinery lease (see subsection (3)),
40
(b)
the term of the derived lease (see subsection (4)),
(c)
the rentals to be regarded as payable under the derived lease
(see subsections (5) to (7)).
(3)
Any question whether the derived lease—
(a)
is a plant or machinery lease, or
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Finance (No.2) Bill
Schedule 8 — Long funding leases of plant or machinery
Part 1 — Capital allowances
211

(b)
if it is such a lease, whether it is also a long funding lease,

is to be determined in accordance with the provisions of this Part.
(4)
The term of the derived lease—
(a)
is limited to the remaining useful economic life of the
relevant plant or machinery at the commencement of the
5
term of the derived lease, but
(b)
subject to that, is to be determined in accordance with section
70YF (the “term” of a lease).
(5)
The rentals that are to be regarded as payable under the derived lease
shall be such rentals (the “deemed rentals”) as are just and
10
reasonable in all the circumstances of the case.
(6)
It shall be assumed that rentals under the derived lease are payable
in equal instalments throughout the term of the lease, unless it is
reasonable to draw a different conclusion from all the circumstances
of the case.
15
(7)
In determining the amount of any deemed rentals, regard shall be
had to—
(a)
all the provisions of the eligible mixed lease,
(b)
the nature of the relevant plant or machinery,
(c)
the value of the relevant plant or machinery at the
20
commencement of the term of the derived lease,
(d)
the amount which, at the commencement of the term of the
derived lease, is expected to be the market value of the
relevant plant or machinery at the end of the term of the
derived lease,
25
(e)
the remaining useful economic life of the relevant plant or
machinery at the commencement of the term of the derived
lease;
(f)
the term of the derived lease.
(8)
Expressions used in section 70L have the same meaning in this
30
section.
The tests for being a funding lease
70N
The finance lease test
(1)
A lease meets the finance lease test in the case of any person if the
lease is one which, under generally accepted accounting practice,
35
falls (or would fall) to be treated as a finance lease or a loan in the
accounts—
(a)
of that person, or
(b)
where that person is the lessor, of any person connected with
him.
40
(2)
In this section “accounts”, in relation to a company, includes any
accounts which—
(a)
relate to two or more companies of which that company is
one, and
(b)
are drawn up in accordance with generally accepted
45
accounting practice.

Finance (No.2) Bill
Schedule 8 — Long funding leases of plant or machinery
Part 1 — Capital allowances
212

(3)
Where for any period—
(a)
a person is not within the charge to income tax or corporation
tax by reason of not being resident in the United Kingdom,
and
(b)
accounts are not prepared in accordance with international
5
accounting standards or UK generally accepted accounting
practice,

any question relating to generally accepted accounting practice is to
be determined for the purposes of this section by reference to
generally accepted accounting practice with respect to accounts
10
prepared in accordance with international accounting standards.
70O
The lease payments test
(1)
A lease meets the lease payments test if—
(a)
the present value of the minimum lease payments (see
section 70YE),
15
  is equal to
(b)
80% or more of the fair value of the leased plant or
machinery.
(2)
The present value of the minimum lease payments is to be calculated
by using the interest rate implicit in the lease.
20
(3)
In this section “fair value” means—
(a)
the market value of the leased plant or machinery,
  less
(b)
any grants receivable towards the purchase or use of that
plant or machinery.
25
(4)
For the purposes of this section—
(a)
the interest rate implicit in the lease is the interest rate that
would apply in accordance with normal commercial criteria,
including, in particular, generally accepted accounting
practice (where applicable), but
30
(b)
if the interest rate implicit in the lease cannot be determined
in accordance with paragraph (a), it is the temporal discount
rate for the purposes of section 70 of the Finance Act 2005
(companies: film relief: valuation of “rights to guaranteed
income” and “disposed rights”).
35
70P
The useful economic life test

A lease meets the useful economic life test if the term of the lease is
more than 65% of the remaining useful economic life of the leased
plant or machinery.
Leases excluded by right of lessor etc to claim capital allowances
40
70Q
Leases excluded by right of lessor etc to claim capital allowances
(1)
A lease is not a long funding lease in the case of the lessee if it is
excluded by virtue of subsection (2).
(2)
A lease is excluded if the lessor, or any superior lessor (see
subsections (6) to (8)),—
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Finance (No.2) Bill
Schedule 8 — Long funding leases of plant or machinery
Part 1 — Capital allowances
213

(a)
is entitled, at the commencement of the term of the lease, to
claim a relevant allowance (see subsection (5)),
(b)
would have been so entitled at that time, but for section 70V
(tax avoidance involving international leasing),
(c)
has at any earlier time been entitled to claim such an
5
allowance, but has not been required to bring a disposal
value into account in accordance with section 61(1)(ee), or
(d)
would fall within any one or more of paragraphs (a) to (c), if
he had been within the charge to income tax or corporation
tax at the inception of the lease and any earlier times.
10
(3)
Where for any period the lessor, or any superior lessor, is a person—
(a)
who is not within the charge to income tax or corporation tax
by reason of not being resident in the United Kingdom, and
(b)
who does not prepare accounts in accordance with
international accounting standards or UK generally accepted
15
accounting practice,

subsection (4) applies.
(4)
In determining whether the condition in subsection (2)(d) is met in
any such case, any question relating to generally accepted
accounting practice in relation to that person and that period is to be
20
determined by reference to generally accepted accounting practice
with respect to accounts prepared in accordance with international
accounting standards.
(5)
A “relevant allowance” is an allowance under this Act in respect of
the leased plant or machinery.
25
(6)
There is a “superior lessor” only if the leased plant or machinery is
the subject of a chain of superior leases.
(7)
Leased plant or machinery is the subject of a chain of superior leases
if—
(a)
the lessor has his interest in relation to the plant or machinery
30
under or by virtue of a lease from a third person (P), or
(b)
the circumstances are as in paragraph (a), but P has his
interest in relation to the plant or machinery under or by
virtue of a lease from a fourth person (Q), or
(c)
the circumstances are as in paragraph (b), but Q has his
35
interest in relation to the plant or machinery under or by
virtue of a lease from a fifth person (R),

and so on, where there is more than a fifth person involved.
(8)
Where any leased plant or machinery is the subject of a chain of
superior leases, the superior lessors are the persons described in
40
subsection (7) as P, Q, R, and so on.
(9)
Subsections (5) to (8) have effect for the interpretation of this section.
Excluded leases of background plant or machinery for a building
70R
Excluded leases of background plant or machinery for a building
(1)
Construe references to an excluded lease of background plant or
45
machinery for a building in accordance with this section.

Finance (No.2) Bill
Schedule 8 — Long funding leases of plant or machinery
Part 1 — Capital allowances
214

(2)
This section applies where—
(a)
plant or machinery is affixed to, or otherwise installed in or
on, any land which consists of or includes a building,
(b)
the plant or machinery is background plant or machinery for
the building (see subsections (4) and (5)),
5
(c)
the plant or machinery is leased with the land under a mixed
lease, and
(d)
none of the disqualifications set out in section 70S applies.
(3)
In any such case, the derived lease of the plant or machinery is an
excluded lease of background plant or machinery for a building.
10
(4)
The background plant or machinery for a building is any plant or
machinery—
(a)
which is of such a description that plant or machinery of that
description might reasonably be expected to be installed in,
or in or on the sites of, a variety of buildings of different
15
descriptions, and
(b)
whose sole or main purpose is to contribute to the
functionality of the building or its site as an environment
within which activities can be carried on.
(5)
Subsection (4) has effect subject to the provisions of any order under
20
section 70T.
70S
The disqualifications
(1)
This section sets out the disqualifications mentioned in subsection
(2)(d) of section 70R and is to be construed as one with that section.
(2)
Disqualification A is that the amounts payable—
25
(a)
under the mixed lease, or
(b)
under any other arrangement,

vary, or may be varied, by reference to the value from time to time to
the lessor of allowances under this Act in respect of expenditure
incurred by him in the provision of the background plant or
30
machinery for the building.
(3)
Disqualification B is that the circumstances of the case are such that
it would not be unreasonable to conclude from them that the main
purpose, or one of the main purposes, of entering into—
(a)
the mixed lease,
35
(b)
a series of transactions of which the mixed lease is one, or
(c)
any of the transactions in such a series,

is to secure that allowances under this Act are available to the lessor
in respect of expenditure incurred in the provision of background
plant or machinery for a building.
40
70T
Orders relating to background plant or machinery for a building
(1)
This section supplements section 70R and is to be construed as one
with it.
(2)
The Treasury may by order prescribe—
(a)
descriptions of plant or machinery to be used as examples of
45
the kinds of plant or machinery that may be regarded as

Finance (No.2) Bill
Schedule 8 — Long funding leases of plant or machinery
Part 1 — Capital allowances
215

falling within the definition of background plant or
machinery for a building in determining whether any
particular plant or machinery does or does not fall within that
definition;
(b)
descriptions of plant or machinery to be deemed to be
5
background plant or machinery for a building;
(c)
descriptions of plant or machinery to be deemed not to be
background plant or machinery for a building.
(3)
An order under this section—
(a)
may make different provision for different cases (including
10
different descriptions of building),
(b)
may contain incidental, consequential, supplemental, or
transitional provision or savings.
(4)
The first order made under this section may include provisions
having effect in relation to times before the making of the order (but
15
not times earlier than 1st April 2006).
Exclusion for certain plant or machinery leased with land
70U
Plant or machinery leased with land: low percentage value
(1)
This section applies where—
(a)
any plant or machinery (the “relevant plant or machinery”) is
20
affixed to, or otherwise installed, in or on any land,
(b)
the plant or machinery is not background plant or machinery
for any building situated in or on the land,
(c)
the plant or machinery is leased with the land under a mixed
lease, and
25
(d)
none of the relevant disqualifications applies.
(2)
For the purposes of this section the “relevant disqualifications” are
the disqualifications set out in section 70S, but for this purpose—
(a)
take the reference in subsection (1) of that section to
subsection (2)(d) of section 70R as a reference to this
30
subsection (and, accordingly, construe the second reference
to that section as a reference to this section), and
(b)
take references in section 70S to background plant or
machinery for a building as references to relevant plant or
machinery.
35
(3)
Where this section applies, the derived lease of the relevant plant or
machinery is excluded by this section if the condition in subsection
(4) is met at the commencement of the term of that lease.
(4)
The condition is that AMV does not exceed both—
(a)
10% of BMV; and
40
(b)
5% of LMV.
(5)
For that purpose—
AMV is the aggregate of—
(a)
the market value of the relevant plant or machinery,
and
45

Finance (No.2) Bill
Schedule 8 — Long funding leases of plant or machinery
Part 1 — Capital allowances
216

(b)
the market value of any other plant or machinery that
falls within subsection (1) in the case of the leased
land;
BMV is the aggregate market value of all the background plant
or machinery leased with the land;
5
LMV is the market value of the land (including buildings and
fixtures).
(6)
For this purpose the market value of any land at any time is to be
determined on the assumption of a sale by an absolute owner of the
land free from all leases and other encumbrances.
10
Avoidance
70V
Tax avoidance involving international leasing
(1)
This section applies where matters are so arranged that there are
plant or machinery leases such that—
(a)
under a lease by a non-resident, an asset is provided directly
15
or indirectly to a resident,
(b)
the direct provision of the asset to the resident is by a lease
which, in the case of the resident, is a long funding lease or a
lease to which section 67 (hire purchase etc) applies,
(c)
the asset is used by the resident for the purpose of leasing it
20
under a lease (the “relevant lease”) that would not (apart
from this section) be a long funding lease in the case of the
resident, and
(d)
under the relevant lease, the asset is provided directly or
indirectly (but by a lease) to a non-resident.
25
(2)
Subsection (3) applies if it would not be unreasonable to conclude,
from all the circumstances of the case, that the sole or main purpose
of arranging matters in that way is to obtain a tax advantage by
securing that allowances under this Part are available to a resident by
virtue of—
30
(a)
section 67 (hire purchase), or
(b)
section 70A (long funding leases).
(3)
In any such case, the relevant lease is deemed to be a long funding
lease in the case of the resident who is the lessor under it.
(4)
The reference in this section to a person obtaining a tax advantage
35
(see section 577(4)) also includes a reference to a person obtaining a
tax advantage within the meaning of Chapter 1 of Part 17 of ICTA
(see section 709 of that Act).
(5)
In this section—
“non-resident” means a person who—
40
(a)
is not resident in the United Kingdom, and
(b)
does not use the plant or machinery exclusively for
earning profits chargeable to tax;
“resident” means a person who—
(a)
is resident in the United Kingdom, or
45
(b)
uses the plant or machinery exclusively for earning
profits chargeable to tax.