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
221

70YB
Long funding operating lease: extension of term of lease
(1)
This section applies in any case where—
(a)
a person is lessor or lessee under a long funding operating
lease (the “existing lease”),
(b)
an event occurs which has the effect of extending the term of
5
the lease (whether by variation of the provisions of the lease,
the grant or exercise of an option or in any other way), and
(c)
the event is not one by reason of which, within the meaning
of section 70YA, the accountancy classification of the lease as
an operating lease changes in the relevant accounts.
10
(2)
For this purpose an event has the effect of extending the term of the
lease if it meets any of the following conditions—
(a)
it has the effect of making a further period a non-cancellable
period;
(b)
it is the grant of an option to the lessee to continue to lease the
15
plant or machinery for a further period, where it is
reasonably certain at the time the option is granted that the
lessee will exercise it;
(c)
it is the exercise by the lessee of an option to continue to lease
the plant or machinery for a further period;
20
(d)
it does not fall within the preceding paragraphs, but it has the
effect that the lessee will continue, or is reasonably certain to
continue, to lease the plant or machinery for a further period.

For this purpose “further period” means a period falling wholly or
partly after the end of the pre-existing term.
25
(3)
The person is to be treated as if—
(a)
the existing lease terminated at the end of the day before the
effective date,
(b)
another lease (the “new lease”) were entered into on the
effective date, and
30
(c)
the term of the new lease were the unexpired portion of the
term of the existing lease, as extended.
(4)
The person is also to be treated as if the effective date were the date
of both—
(a)
the inception of the new lease, and
35
(b)
the commencement of the term of the new lease.
(5)
The new lease is to be taken to be a long funding operating lease.
(6)
For the purposes of this section the “effective date” is the earlier of—
(a)
the day after the end of the pre-existing term of the existing
lease;
40
(b)
if the rentals payable are varied as a result of or otherwise in
connection with the event, the date on which the variation
takes effect.
(7)
In this section—
“non-cancellable period” has the same meaning as in section
45
70YF (the “term” of a lease);
“pre-existing term”, in relation to a lease, means the term of the
lease apart from the extension in question.

Finance (No.2) Bill
Schedule 8 — Long funding leases of plant or machinery
Part 1 — Capital allowances
222

70YC
Extension of term of lease that is not a long funding lease
(1)
This section applies where—
(a)
a person is lessor under a plant or machinery lease (the
“existing lease”) that is not a long funding lease, and
(b)
an event occurs which has the effect of extending the term of
5
the lease (whether by variation of the provisions of the lease,
the grant or exercise of an option or in any other way).
(2)
Subsection (2) of section 70YB (events having the effect of extending
the term of a lease) also has effect for the purposes of this section.
(3)
Make the following assumptions—
10
(a)
the existing lease terminates immediately before the effective
date,
(b)
another lease (the “new lease”) is entered into on the effective
date,
(c)
the term of the new lease is the portion of the term of the
15
existing lease, as extended, that remains unexpired as at the
effective date;
(d)
the effective date is the date of both—
(i)
the inception of the new lease, and
(ii)
the commencement of the term of the new lease.
20
(4)
If, on those assumptions, the new lease would be a long funding
lease, the person is to be treated on those assumptions.
(5)
If subsection (4) does not apply, then, for the purposes of any
subsequent application of this section or section 70YD in the case of
the existing lease, the term of the existing lease is to be taken to be the
25
term as extended (or further extended).
(6)
For the purposes of this section the “effective date” is the earlier of—
(a)
the day after the end of the pre-existing term of the existing
lease;
(b)
if the rentals payable are varied as a result of or otherwise in
30
connection with the event, the date on which the variation
takes effect.
(7)
In this section “pre-existing term”, in relation to a lease, means the
term of the lease apart from the extension in question.
70YD
Increase in proportion of residual amount guaranteed: review of status
35
(1)
This section applies where—
(a)
a person is lessor under a lease (the “existing lease”) that is
not a long funding lease,
(b)
the person enters into an arrangement which meets, or
arrangements which (taken together) meet, the conditions in
40
subsection (2).
(2)
The conditions are that—
(a)
as a result of the arrangement or arrangements, there is an
increase, after the inception of the lease, in the proportion of
the residual amount that is guaranteed as mentioned in
45
section 70YE(1)(b), and

Finance (No.2) Bill
Schedule 8 — Long funding leases of plant or machinery
Part 1 — Capital allowances
223

(b)
had the arrangement or arrangements been entered into
before the inception of the lease, the lease would have been a
long funding lease.
(3)
The person is to be treated as if—
(a)
the existing lease had terminated immediately before the
5
time of the relevant transaction,
(b)
another lease (the “new lease”) had been entered into
immediately after the time of the relevant transaction,
(c)
the term of the new lease were the portion of the term of the
existing lease that remains unexpired as at the date of the
10
relevant transaction;
(d)
the date of the relevant transaction were the date of both—
(i)
the inception of the new lease, and
(ii)
the commencement of the term of the new lease.
(4)
For the purposes of this section, the “relevant transaction” is the
15
arrangement or, where two or more arrangements have been entered
into, the latest of them.
(5)
The Treasury may by regulations make provision for or in
connection with restricting the application or operation of this
section.
20
Interpretation
70YE
“Minimum lease payments”
(1)
In the case of any lease, the minimum lease payments are the
minimum payments under the lease over the term of the lease
(including any initial payment) together with—
25
(a)
in the case of the lessee, so much of any residual amount as is
guaranteed by him or a person connected with him, or
(b)
in the case of the lessor, so much of any residual amount as is
guaranteed by the lessee or a person who is not connected
with the lessor.
30
(2)
In determining the minimum payments, exclude so much of any
payment as represents—
(a)
charges for services, or
(b)
qualifying UK or foreign tax to be paid by the lessor.
(3)
In this section—
35
“qualifying UK or foreign tax” means any tax or duty
chargeable under the law of any part of the United Kingdom,
or under the law of any foreign country, other than—
(a)
income tax,
(b)
corporation tax,
40
(c)
any tax chargeable under the law of a foreign country
which is similar to income tax or corporation tax,
and here “foreign country” means any territory outside the
United Kingdom;
“residual amount” means so much of the fair value of the plant
45
or machinery subject to the lease as cannot reasonably be

Finance (No.2) Bill
Schedule 8 — Long funding leases of plant or machinery
Part 1 — Capital allowances
224

expected to be recovered by the lessor from the payments
under the lease.
(4)
In the definition of “residual amount” in subsection (3), “fair value”
means—
(a)
the market value of the leased plant or machinery,
5
  less
(b)
any grants receivable towards the purchase or use of that
plant or machinery.
70YF
The “term” of a lease
(1)
The term of a lease is the period comprising—
10
(a)
so much of the post-commencement period as is a non-
cancellable period, and
(b)
any subsequent periods which meet the conditions in
subsection (2).
(2)
The conditions are that—
15
(a)
the lessee has an option to continue to lease the asset for the
period (whether with or without further payment), and
(b)
it is reasonably certain, at the inception of the lease, that the
lessee will exercise that option.
(3)
The “post-commencement period” is so much of the period of the
20
lease as begins with the commencement of the term of the lease.
(4)
A “non-cancellable period” is any period during which the lessee
may terminate the lease only—
(a)
upon the occurrence of some remote contingency, or
(b)
upon payment by the lessee of such an additional amount
25
that, at the inception of the lease, continuation of the lease is
reasonably certain.
(5)
If, at the commencement of the term of the lease,—
(a)
the market value of the asset exceeds £1 million, and
(b)
the estimated market value of the asset 5 years after the
30
commencement of the term of the lease is more than half of
the market value of the asset at the commencement of the
term of the lease,

subsection (6) applies.
(6)
If, in any such case, the term of the lease (apart from this subsection)
35
would be 5 years or less, but—
(a)
the lessee has one or more options to continue to lease the
asset,
(b)
on the assumption that it is reasonably certain, at the
inception of the lease, that the lessee will exercise those
40
options, the term of the lease would exceed 7 years, and
(c)
on failing to exercise any one of those options, the lessee may
be required to make a payment to the lessor,

it is to be assumed for the purposes of this section that any option to
continue to lease the asset will be exercised, unless it is reasonably
45
certain, at the inception of the lease, that the option will not be
exercised.

Finance (No.2) Bill
Schedule 8 — Long funding leases of plant or machinery
Part 1 — Capital allowances
225

(7)
Subsection (6) does not apply if, leaving out of account any options
that would, by virtue of that subsection, result in the term of the lease
exceeding 7 years, Conditions A, B and C in section 70I (meaning of
“short lease”) are met.
(8)
See also section 70YC(5) (extension, for certain purposes, of term of
5
lease that is not a long funding lease).
70YG
“Termination amount”
(1)
This section applies where plant or machinery is or has been, or is to
be, leased under a long funding lease.
(2)
Construe “termination amount”, in the case of a long funding lease,
10
in accordance with the following provisions of this section.
(3)
If—
(a)
the lease terminates as a result of a plant or machinery
disposal event, or
(b)
a plant or machinery disposal event occurs as a result of, or
15
otherwise in connection with, the termination of the lease,

the termination amount is the disposal value that would have fallen
to be brought into account by the lessor by reason of the plant or
machinery disposal event on the assumptions in subsection (4).
(4)
Those assumptions are—
20
(a)
that section 34A (which prevents the lessor’s expenditure for
long funding leasing from being qualifying expenditure) did
not apply in the case of the lessor, and
(b)
that the lessor had claimed all the capital allowances that
would in consequence have been available to him.
25
(5)
If—
(a)
subsection (3) does not apply, and
(b)
the lease is a long funding finance lease,

the termination amount is the value at which, immediately after the
termination of the lease, the plant or machinery is recognised in the
30
books or other financial records of the lessor.
(6)
If—
(a)
subsection (3) does not apply, and
(b)
the lease is a long funding operating lease,

the termination amount is the market value of the plant or machinery
35
immediately after the termination of the lease.
(7)
For the purposes of this section a “plant or machinery disposal
event” is an event that would have been a disposal event in relation
to the plant or machinery in the case of the lessor on the assumptions
in subsection (4).
40
70YH
“Termination value”
(1)
This section applies where plant or machinery is or has been, or is to
be, leased under a long funding lease.
(2)
Construe “termination value” in accordance with the following
provisions of this section.
45

Finance (No.2) Bill
Schedule 8 — Long funding leases of plant or machinery
Part 1 — Capital allowances
226

(3)
The general rule is that the termination value of any plant or
machinery is the value of the plant or machinery at or about the time
when the lease terminates.
(4)
Any reference to calculation by reference to the termination value
includes a reference to calculation by reference to any one or more
5
of—
(a)
the proceeds of sale, if the plant or machinery is sold after the
lease comes to an end,
(b)
any insurance proceeds, compensation or similar sums in
respect of the plant or machinery,
10
(c)
an estimate of the market value of the plant or machinery.
(5)
Any reference to calculation by reference to the termination value
also includes a reference to—
(a)
determination in a way which, or by reference to factors or
criteria which, might reasonably be expected to produce a
15
broadly similar result to calculation by reference to the
termination value, or
(b)
any other form of calculation indirectly by reference to the
termination value.
70YI
General definitions
20
(1)
Construe these expressions as follows—
“absolute owner”, in the application of this Chapter in relation
to Scotland, means the owner;
“arrangement” includes any transaction or series of
transactions;
25
“background plant or machinery for a building” is to be
construed in accordance with sections 70R to 70T;
“building” includes a reference to—
(a)
a structure,
(b)
part of a building or structure;
30
“commencement”, in relation to the term of a lease, means the
date on and after which the lessee is entitled to exercise his
right to use the complete leased asset under the lease;
for this purpose an asset is to be regarded as complete if its
construction is substantially complete;
35
“derived lease” is to be construed in accordance with section
70L;
“the finance lease test” means the finance lease test in section
70N;
“fixture”—
40
(a)
means any plant or machinery that is so installed or
otherwise fixed in or to a building or other
description of land as to become, in law, part of that
building or other land, and
(b)
includes any boiler or water-filled radiator installed
45
in a building as part of a space or water heating
system;
“funding lease” has the meaning given by section 70J;

Finance (No.2) Bill
Schedule 8 — Long funding leases of plant or machinery
Part 1 — Capital allowances
227

“inception”, in relation to a plant or machinery lease, means the
earliest date on which the following conditions are met—
(a)
there is a contract in writing for the lease between the
lessor and the lessee,
(b)
either—
5
(i)
the contract is unconditional, or
(ii)
if it is conditional, the conditions have been
met,
(c)
no terms remain to be agreed;
“initial payment”, in the case of a plant or machinery lease,
10
means a payment by the lessee—
(a)
at or before the time when the lease is entered into,
and
(b)
in respect of the plant or machinery which is the
subject of the lease;
15
“lease” includes any agreement or arrangement which is or
includes a plant or machinery lease (and “lessor”, “lessee”
and other related expressions are to be construed
accordingly);
“lease”, in relation to land, includes—
20
(a)
an underlease, sublease or any tenancy,
(b)
in England and Wales or Northern Ireland, an
agreement for a lease, underlease, sublease, or
tenancy,
(c)
in Scotland, an agreement (including missives of let
25
not constituting a lease) under which a lease, sublease
or tenancy is to be executed,
(d)
in the case of land situated outside the United
Kingdom, any interest corresponding to a lease as so
defined,
30
and “lessor”, “lessee” and other related expressions are to be
construed accordingly;
“lease”, in relation to plant or machinery, includes a sublease
(and “lessor”, “lessee” and other related expressions are to be
construed accordingly);
35
“lessee”, in relation to a lease, includes any person entitled to
the lessee’s interest under the lease;
“lessor”, in relation to a lease, includes any person entitled to
the lessor’s interest under the lease;
“long funding lease” has the meaning given by section 70G;
40
“long funding finance lease” means a long funding lease that
meets the finance lease test by virtue of section 70N(1)(a);
“long funding operating lease” means a long funding lease
which is not a long funding finance lease;
“market value”, in relation to plant or machinery, is to be
45
construed in accordance with subsection (2);
“minimum lease payments” has the meaning given by section
70YE;
“mixed lease” is to be construed in accordance with section 70L;
“plant or machinery lease” has the meaning given by section
50
70K (and see also sections 70L and 70M);