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
228

“remaining useful economic life”, in the case of any leased plant
or machinery, is the period—
(a)
beginning with the commencement of the term of the
lease, and
(b)
ending when the asset is no longer used, and no
5
longer likely to be used, by any person for any
purpose as a fixed asset of a business;
“short lease” is to be construed in accordance with section 70I;
“the term”, in relation to a lease, is to be construed in accordance
with section 70YF (but see also section 70YC(5) (extension, for
10
certain purposes, of term of lease that is not a long funding
lease));
“termination”, in relation to a lease,—
(a)
means the coming to an end of the lease, whether by
effluxion of time or in any other way, and
15
(b)
includes in particular the bringing to an end of the
lease by any person or by operation of law,
and related expressions are to be construed accordingly;
“termination amount” is to be construed in accordance with
section 70YG;
20
“termination value” is to be construed in accordance with
section 70YH.
(2)
The market value of any plant or machinery at any time is to be
determined on the assumption of a disposal by an absolute owner
free from all leases and other encumbrances.
25
(3)
In relation to a lease, any reference to plant or machinery includes a
reference to fixtures.
(4)
Section 839 of ICTA (connected persons) applies.
(5)
Any necessary apportionments under or by virtue of this Chapter are
to be made on a just and reasonable basis.
30
70YJ
Power to vary the meaning of certain expressions
(1)
The Treasury may by regulations make provision amending this
Chapter so as to vary—
(a)
the meaning of “plant or machinery lease”, or
(b)
the finance lease test.
35
(2)
A statutory instrument containing regulations under this section is
not to be made unless a draft of the instrument has been laid before,
and approved by a resolution of, the House of Commons.”.
Cases in which short-life asset treatment is ruled out
8     (1)
The Table in section 84 is amended as follows.
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Finance (No.2) Bill
Schedule 8 — Long funding leases of plant or machinery
Part 2 — Corporation tax
229

      (2)
In paragraph 1 after sub-paragraph (a) insert—

(aa)
section 13A (use for other

purposes of plant or

machinery provided for

long funding leasing), or

5
Fixtures
9     (1)
In section 172 (scope of Chapter 14 of Part 2 (fixtures)) after subsection (2)
insert—
“(2A)
Subsections (1) and (2) are subject to section 172A.”.
      (2)
After section 172 insert—
10
“172A
  Long funding leases etc: cases where this Chapter does not apply.
(1)
This section applies where plant or machinery that is or becomes a
fixture is the subject of a long funding lease (see Chapter 6A).
(2)
This section also applies if, in any such case,—
(a)
the lessee under the long funding lease is or becomes the
15
lessor of some or all of the plant or machinery under a further
lease, and
(b)
the further lease is not itself a long funding lease within
subsection (1).
(3)
This Chapter does not apply to determine the entitlement of the
20
lessor or the lessee (under either lease) to allowances under this Part
in respect of expenditure on the plant or machinery.
(4)
This Chapter does not apply to determine whether the lessor or the
lessee (under either lease) is to be treated as the owner of the plant or
machinery.”.
25
Part 2
Corporation tax
Introductory
10
ICTA is amended as follows.
Special rules for long funding leases
30
11
In Part 12 (special classes of companies and businesses) after section 502

Finance (No.2) Bill
Schedule 8 — Long funding leases of plant or machinery
Part 2 — Corporation tax
230

insert the following Chapter—
“Chapter 5A
Special rules for long funding leases of plant or machinery: corporation tax
Introductory
502A
  Scope of Chapter 5A
5

This Chapter has effect for the purposes of corporation tax only.
Lessors under long funding finance leases
502B
Lessor under long funding finance lease: rental earnings
(1)
This section applies for determining for the purposes of corporation
tax the profits of a company for any period of account in which it is
10
the lessor of any plant or machinery under a long funding finance
lease.
(2)
The amount to be brought into account as the lessor’s taxable income
from the lease for the period of account is the amount of the rental
earnings in respect of the lease for the period of account.
15
(3)
The “rental earnings” for any period is the amount which, in
accordance with generally accepted accounting practice, falls (or
would fall) to be treated as the gross return on investment for that
period in respect of the lease where it meets the finance lease test.
(4)
If the lease is one which, under generally accepted accounting
20
practice, falls (or would fall) to be treated as a loan in the accounts in
question, so much of the rentals under the lease as fall (or would fall)
to be treated as interest are to be treated for the purposes of this
section as rental earnings.
502C
Lessor under long funding finance lease: exceptional items
25
(1)
This section applies for determining for the purposes of corporation
tax the profits of a company which 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
or capital nature)—
30
(a)
arises to the company 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
(c)
would not, apart from this section, be brought into account in
35
computing the profits of the company for the purposes of
corporation tax.
(3)
The profit or loss is to be treated—
(a)
in the case of a profit, as income of the company attributable
to the lease,
40
(b)
in the case of a loss, as a revenue expense incurred by the
company in connection with the lease.

Finance (No.2) Bill
Schedule 8 — Long funding leases of plant or machinery
Part 2 — Corporation tax
231

(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—
(a)
in the company’s profit and loss account or income
statement,
5
(b)
in the company’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 company’s profits or losses for that period.
502D
Lessor under long funding finance lease making termination payment
10
(1)
This section applies for determining the liability to corporation tax of
a company which is or has been the lessor under a long funding
finance lease.
(2)
Where—
(a)
the lease terminates, and
15
(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
computing the profits of the company.
(3)
This section does not prevent a deduction in respect of a sum to the
20
extent that the sum is brought into account in determining the
company’s rental earnings.
Lessors under long funding operating leases
502E
Lessor under long funding operating lease: periodic deduction
(1)
This section applies for determining for the purposes of corporation
25
tax the profits of a company for any period of account—
(a)
for the whole of which, or
(b)
for any part of which,

the company is the lessor of any plant or machinery under a long
funding operating lease.
30
(2)
A deduction is allowed in computing the profits of the company for
the period of account.
(3)
The amount of the deduction for any period of account is to be
determined as follows.
(4)
First, find the “relevant value” for the purposes of subsection (6)(a)
35
below, 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
as a qualifying activity, cost;
(b)
if the last previous use of the plant or machinery by the lessor
40
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
was the leasing of it under a long funding finance lease as a
qualifying activity, the recognised value;
45

Finance (No.2) Bill
Schedule 8 — Long funding leases of plant or machinery
Part 2 — Corporation tax
232

(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
market value;
(e)
if the lessor owns the plant or machinery as a result of having
5
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
lessor for the purposes of a qualifying activity on or
after 1st April 2006, and
10
(ii)
that qualifying activity is the leasing of the plant or
machinery under the long funding operating lease,

the relevant value is the lower of first use market value and
first use amortised value.
(5)
In subsection (4) above—
15
“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
machinery would have at the time when it is first brought
into use for the purposes of the qualifying activity, on the
20
assumption that—
(a)
the cost of acquiring the plant or machinery had been
written off on a straight line basis over the remaining
useful economic life of the plant or machinery, and
(b)
any further capital expenditure incurred had been
25
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;
“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
30
purposes of the qualifying activity;
“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
35
machinery is recognised in the books or other financial
records of the lessor at the commencement of the long
funding operating lease.
(6)
From—
(a)
the relevant value determined in accordance with subsection
40
(4) above,
  subtract
(b)
the amount which, at the commencement of the term of the
lease, is (or, in a case falling within subsection (4)(e) above,
would have been) expected to be the residual value of the
45
plant or machinery,

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.
50

Finance (No.2) Bill
Schedule 8 — Long funding leases of plant or machinery
Part 2 — Corporation tax
233

(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 deduction for any period of account is the amount
so apportioned to that period.
502F
Long funding operating lease: lessor’s additional expenditure
5
(1)
This section applies if in any period of account—
(a)
a company is the lessor of any plant or machinery under a
long funding operating lease,
(b)
the company incurs capital expenditure in relation to the
plant or machinery, and
10
(c)
that capital expenditure (the “additional expenditure”) is not
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 502E(4)(e) above, subsection (1)(c)
above has effect as if the reference to the commencement of the term
15
of the lease were a reference to the time when the plant or machinery
is first brought into use by the lessor for the purposes of the
qualifying activity.
(3)
Where this section applies, an additional deduction is allowed in
computing the profits of the company for each post-expenditure
20
period of account in which the company is the lessor of the plant or
machinery under the lease.
(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—
25
“ARV” is the amount which, at the time when the additional
expenditure is incurred, is expected to be the residual value
of the plant or machinery;
“CRV” is the amount which, at the commencement of the term
of the lease, is expected to be the residual value of the plant
30
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
section in relation to any previous additional expenditure
incurred by the company in relation to the leased plant or
35
machinery;
“TRV” is the total of CRV and PRV.
(6)
Find RRV, where—
(a)
if ARV exceeds TRV, RRV is the portion of the excess that is
a result of the additional expenditure, but
40
(b)
if ARV does not exceed TRV, RRV is nil.
(7)
From—
(a)
the amount of the additional expenditure,
  subtract
(b)
RRV,
45

to find the expected partial reduction in value over the remainder of
the term of the lease.

Finance (No.2) Bill
Schedule 8 — Long funding leases of plant or machinery
Part 2 — Corporation tax
234

(8)
Apportion the amount of that expected partial reduction in value to
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
5
period of account.
(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
10
expenditure.
502G
Lessor under long funding operating lease: termination of lease
(1)
This section applies for determining the liability to corporation tax of
a company which is the lessor immediately before the termination of
a long funding operating lease.
15
(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
reference to the termination value (LP).
(3)
Step 2 is to find—
20
(a)
the relevant value for the purposes of section 502E(6)(a) (RV);
(b)
the total of the deductions allowable under section 502E for
periods of account for the whole or part of which the
company was the lessor before the termination of the lease
(TD1);
25
(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 company which constitute additional expenditure for the
purposes of section 502F in the case of the lease (TAE);
30
(b)
the total of any deductions allowable under section 502F for
periods of account for the whole or part of which the
company was the lessor before the termination of the lease
(TD2);
(c)
the amount, if any, (EAE) by which TAE exceeds TD2.
35
(5)
Step 4 is to find the total of ERV and EAE (T).
(6)
If (TA - LP) exceeds T, treat a profit of an amount equal to the excess
as arising to the company 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
40
arising to the company in that period of account.
(8)
A profit or loss treated as arising to the company under subsection
(6) or (7) above is to be treated—
(a)
in the case of a profit, as income of the company attributable
to the lease,
45