Finance (No.2) Bill

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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 2 — Corporation tax
235

(b)
in the case of a loss, as a revenue expense incurred by the
company in connection with the lease.
(9)
In computing the profits of the company, no deduction is allowed in
respect of any sums paid to the lessee that are calculated by reference
to the termination value.
5
Insurance company as lessor
502H
Insurance company as lessor
(1)
This section applies to a company carrying on life assurance business
if it is the lessor under a long funding lease in a period of account.
(2)
In this section—
10
(a)
subsections (3) to (7) have effect in relation to—
(i)
basic life assurance and general annuity business, and
(ii)
long-term business which is not life assurance
business, and
(b)
subsections (8) to (10) have effect in relation to certain
15
computations falling to be made in accordance with the
provisions of this Act applicable to Case I of Schedule D.
(3)
Subsection (4) below applies in the case of each of the following
amounts—
(a)
an amount of rental earnings which the company is required
20
by section 502B (long funding finance lease) to bring into
account as taxable income,
(b)
an amount treated under section 502C(3)(a) (long funding
finance lease: lessor’s exceptional items) as a profit arising to
the company,
25
(c)
an amount of rental income arising to the company from a
long funding operating lease,
(d)
an amount treated under section 502G(8)(a) (long funding
operating lease: lessor’s excess termination amount) as a
profit arising to the company,
30

but only if the leased asset is an asset of the company’s long-term
insurance fund.
(4)
In determining for the purposes of the Corporation Tax Acts in any
such case the extent to which any such amount is referable to—
(a)
basic life assurance and general annuity business, or
35
(b)
long-term business which is not life assurance business,

section 432A (apportionment of insurance companies’ income) is to
have effect in relation to the amount as it has effect in relation to the
income arising from an asset.

This subsection is subject to subsections (5) and (6) below.
40
(5)
Before applying subsection (4) above in a case where—
(a)
that subsection applies by virtue of subsection (3)(a) above in
relation to an amount of rental earnings, and
(b)
there is an amount which is deductible as a revenue expense
by virtue of section 502C(3)(b) (long funding finance lease:
45
lessor’s exceptional items),

Finance (No.2) Bill
Schedule 8 — Long funding leases of plant or machinery
Part 2 — Corporation tax
236


the amount so deductible is to be given effect by applying it, so far as
possible, in reducing the amount of the rental earnings.
(6)
Before applying subsection (4) above by virtue of subsection (3)(c)
above in relation to an amount of rental income,—
(a)
any deduction falling to be made under section 502E, or
5
(b)
any reduction falling to be made under section 502F,

is to be given effect by applying it, so far as possible, in reducing (or
further reducing) the amount of the rental income.
(7)
Where, after applying amounts in making reductions required by
subsection (5) or (6) above, there remains unapplied an amount in
10
respect of—
(a)
a deduction falling to be made under section 502E,
(b)
a reduction falling to be made under section 502F, or
(c)
an amount deductible as a revenue expense by virtue of
section 502C(3)(b),
15

the amount is to be apportioned under section 432A in the same way
as income.
(8)
Where—
(a)
the leased asset is an asset of the company’s long-term
insurance fund, and
20
(b)
a computation falling within subsection (9) below falls to be
made,

subsection (10) below applies to the computation.
(9)
A computation falls within this subsection if it is a computation of
profits of—
25
(a)
life assurance business carried on by the company, or
(b)
any category of life assurance business carried on by the
company,

and falls to be made in accordance with the provisions of this Act
applicable to Case I of Schedule D.
30
(10)
In making the computation, no amount shall be brought into account
by virtue of any of the following provisions—
(a)
section 502B (long funding finance lease: rental earnings),
(b)
section 502C(3)(a) or (b) (long funding finance lease: profit or
loss in respect of exceptional items),
35
(c)
section 502E (long funding operating lease: periodic
deduction),
(d)
section 502F (long funding operating lease: lessor’s
additional expenditure),
(e)
section 502G(8)(a) or (b) (long funding operating lease:
40
lessor’s profit or loss in respect of termination amount).
Lessees under long funding finance leases
502I
Lessee under long funding finance lease: limit on deductions
(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
45

Finance (No.2) Bill
Schedule 8 — Long funding leases of plant or machinery
Part 2 — Corporation tax
237

the lessee of any plant or machinery under a long funding finance
lease.
(2)
In calculating the company’s profits for the period of account,—
(a)
the amount deducted in respect of amounts payable under
the lease,
5
  must not exceed
(b)
the amounts which, in accordance with generally accepted
accounting practice, fall (or would fall) to be shown in the
company’s accounts as finance charges in respect of the lease.
(3)
If the lease is one which, under generally accepted accounting
10
practice, falls (or would fall) to be treated as a loan, subsection (2)
above applies as if the lease were one which, under generally
accepted accounting practice, fell to be treated as a finance lease.
502J
Lessee under long funding finance lease: termination
(1)
This section applies where—
15
(a)
a company is or has been the lessee under a long funding
finance lease, and
(b)
in connection with the termination of the lease, a payment
calculated by reference to the termination value falls to be
made to the company.
20
(2)
The payment is not to be brought into account in determining for the
purposes of corporation tax the profits of the company for any
period of account.
(3)
Subsection (2) above does not affect the amount of any disposal
value that falls to be brought into account by the company under the
25
Capital Allowances Act.
Lessees under long funding operating leases
502K
Lessee under long funding operating lease
(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
30
the lessee of any plant or machinery under a long funding operating
lease.
(2)
The deductions that may be allowed in computing the profits of the
company for the period of account are to be reduced in accordance
with the following provisions of this section.
35
(3)
The amount of the reduction for any period of account is to be
determined as follows.
(4)
First, find the “relevant value” for the purposes of subsection (6)(a)
below, which is—
(a)
the market value of the plant or machinery at the
40
commencement of the term of the lease, unless paragraph (b)
below applies;
(b)
if the lessee—
(i)
has the use of the plant or machinery as a result of
having incurred expenditure on its provision for
45
purposes other than those of a qualifying activity, but

Finance (No.2) Bill
Schedule 8 — Long funding leases of plant or machinery
Part 2 — Corporation tax
238

(ii)
brings the plant or machinery into use for the
purposes of a qualifying activity on or after 1st April
2006,

the lower of first use market value and first use amortised
market value.
5
(5)
In subsection (4) above—
“first use amortised market value” means the value that the
plant or machinery would have—
(a)
at the time when it is first brought into use for the
purposes of the qualifying activity, but
10
(b)
on the assumption that the market value of the plant
or machinery at the commencement of the term of the
lease had been written off on a straight line basis over
the remaining useful economic life of the plant or
machinery;
15
“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
purposes of the qualifying activity.
(6)
From—
(a)
the relevant value determined in accordance with subsection
20
(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)(b) above,
would have been) expected to be the market value of the
25
plant or machinery at the end of the term of the lease,

to find the expected gross reduction over the term of the lease.
(7)
Apportion the amount of that expected gross reduction to each
period of account in which any part of the term of the lease falls.
(8)
The apportionment must be on a time basis according to the
30
proportion of the term of the lease that falls in each period of account.
(9)
The amount of the reduction for any period of account is the amount
so apportioned to that period.
Interpretation of Chapter
502L
Interpretation of this Chapter
35
(1)
This section has effect for the interpretation of this Chapter.
(2)
In this Chapter—
“qualifying activity” has the same meaning as in Part 2 of the
Capital Allowances Act;
“residual value”, in relation to any plant or machinery leased
40
under a long funding operating lease, means—
(a)
the estimated market value of the plant or machinery
on a disposal at the end of the term of the lease,
  less
(b)
the estimated costs of that disposal.
45

Finance (No.2) Bill
Schedule 8 — Long funding leases of plant or machinery
Part 3 — Income tax
239

(3)
Any reference in this Chapter to a sum being written off on a straight
line basis over a period of time (the “writing-off period”) is a
reference to—
(a)
the sum being apportioned between each of the periods of
account in which any part of the writing-off period falls,
5
(b)
that apportionment being made on a time basis, according to
the proportion of the writing-off period that falls in each of
the periods of account, and
(c)
the sum being written off accordingly.
(4)
Chapter 6A of Part 2 of the Capital Allowances Act (interpretation of
10
provisions about long funding leases) applies in relation to this
Chapter as it applies in relation to that Part.”.
Part 3
Income tax
Introductory
15
12
ITTOIA 2005 is amended as follows.
Special rules for long funding leases
13
In Part 2 (trading income) after Chapter 10 insert the following Chapter—
“Chapter 10A
Leases of plant or machinery: special rules for long funding leases
20
Lessors under long funding finance leases
148A
Lessor under long funding finance lease: rental earnings
(1)
This section applies for the purpose of calculating the profits of a
person carrying on a trade for a period of account in which he is the
lessor of any plant or machinery under a long funding finance lease.
25
(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.
(3)
The “rental earnings” for any period is the amount which, in
accordance with generally accepted accounting practice, falls (or
30
would fall) to be treated as the gross return on investment for that
period in respect of the long funding lease where it meets the finance
lease test.
(4)
If the lease is one which, under generally accepted accounting
practice, falls (or would fall) to be treated as a loan in the accounts in
35
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.