House of Commons
|Session 2008 - 09|
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General Committee Debates
The Committee consisted of the following Members:
Liam Laurence Smyth, Committee Clerk
attended the Committee
Public Bill Committee
Tuesday 16 June 2009
[Mr. Jim Hood in the Chair]
(Except Clauses 7, 8, 9, 11, 14, 16, 20 and 92)
Sale of lessor companies etc: anti-avoidance
Question proposed, That the clause stand part of the Bill.
The Chairman: With this it will be convenient to discuss the following: that schedule 31 be the Thirty-first schedule to the Bill.
Mr. Greg Hands (Hammersmith and Fulham) (Con): I begin by welcoming you back to the Chair for this afternoons sitting, Mr. Hood.
We are in the middle of a set of clauses that relate to anti-avoidance, with another three to go. Clause 62 and schedule 31 are anti-avoidance measures, designed to prevent the creation of leases that only ever make losses.
Anti-avoidance provisions were introduced in schedule 10 to the Finance Act 2006 in relation to changes in the ownership of companies carrying on a leasing business. Before that legislation was passed, a tax advantage could arise when a lessor company was sold to a group that expected to have tax losses available for surrender by way of group relief. The 2006 Act made provision to target changes in the economic ownership of a plant or machinery leasing business carried on by a company on its own or in partnership. That legislation applies to simple sales of shares in a leasing company and to changes in partnership sharing arrangements, in addition to any other route by which the economic ownership of a business could be changed.
The legislation aims to prevent an unacceptable permanent deferral of tax. It was previously possible for a leasing company to generate losses in the early years of a long leasing contract as a consequence of the availability of capital allowances, with such losses being available for group relief. In the later years of the lease, the capital allowances would be reduced and the company would become profitable. If the leasing company was sold in the interim to a loss-making company or group, the leasing companys profits would be covered by the new owners losses. Thus, an acceptable temporary deferral of tax became a permanent deferral of tax.
The tax advantage arose because the tax relief available via capital allowances normally exceeds the commercial depreciation at the outset of a lease. The timing advantage reverses later in the lease period. The effect of the
The 2006 Act tried to counter that practice by ensuring that an accounting period ends on the sale of a lessor company. The company is treated as receiving income in the accounting period ending on the change of ownership, to the extent that the tax written down value of the assets is less than the accounts value. A deduction of the same amount arises in the next accounting period of the lessee company.
Schedule 31 includes Government proposals to change the 2006 Act, most of which should ensure that the legislation works as intended in all circumstances, including in complex transactions. Schedule 10 to the 2006 Act introduced a charge for lessor companies when sold to recover the tax timing advantage they received from capital allowance claims. That charge was an amount of income introduced by reference to the difference between the balance sheet value of assets owned by the lessor company and their tax written down valuethat is, the amount still eligible for capital allowances. Clearly, if the lessor company did not own the assets, the balance sheet value of assets would be zero.
Lessor companies had been trying to avoid the consequences of schedule 10 to the 2006 Act by entering into sale and leaseback arrangements so that they no longer owned the asset subject to the lease, but could still claim capital allowances. I understand that schedule 31 removes the requirement for the lessor company to own the asset and makes provisions for ascertaining the value of an asset that may not be on the companys balance sheet. The changes apply to all accounting periods that end on or after 22 April 2009, and we support the changes proposed.
The Financial Secretary to the Treasury (Mr. Stephen Timms): I, too, bid you a warm welcome to the Chair for our deliberations this afternoon, Mr. Hood. I am grateful to the hon. Member for Hammersmith and Fulham for setting out what the clause does, but let me add a little to what he has said.
The sale of lessor companies legislation, which was introduced Finance Act 2006, prevents a potential loss of tax when a lessor company is sold. It does that by bringing into charge an amount that reflects the difference between the value for capital allowances purposes and the commercial accounting value of assets that the company owns. Where the lessor company is an intermediate lessorone that leases an asset in from one party and leases the same asset out to another partyit may be able to claim capital allowances even though it does not own the assets that it leases out. It therefore benefits from the capital allowances in the same way as a lessor company that owns the assets, but because it does not own the asset, the legislation fails to bring the appropriate amount into charge when the company is sold.
We gather from disclosures under the tax avoidance scheme disclosure rules that groups have entered into sale and leaseback arrangements that turned what was a
The legislation was first published in draft on 13 November 2008, and has been effective from that date. I am pleased to say that HMRC has received no negative representations about it.
Question put and agreed to.
Clause 62 accordingly ordered to stand part of the Bill.
Schedule 31 agreed to.
Leases of plant or machinery
Question proposed, That the clause stand part of the Bill.
The Chairman: With this it will be convenient to discuss the following: that schedule 32 be the Thirty-second schedule to the Bill.
Mr. Hands: The clause and schedule relate to long funding leases of plant and machinery and to anti-avoidance. Long funding leases are a special type of lease that, following the Finance Act 2006, break with the traditional rule that the owner of the asset is the person entitled to any capital allowances available in respect of it. Instead, under a long funding lease, the lesseethe person to whom the asset is being leasedhas the right to claim allowances.
The measures in schedule 32 were announced on 13 November 2008, just before the pre-Budget report, and seek to address the following problems, most of which look to us like genuine loophole avoidance and ought to be blocked. The explanatory notes to the clause, particularly the Background Note from paragraph 38 onward, indicate that the measures arise out of disclosure, but give only a broad indication of the problems with key definitions such as that of sale and leaseback.
It is thought that the offending schemes worked along the following lines. First, before 13 November 2008, it was possible for the owner of an asset to sell the right to future rentals from the asset, then grant a long funding finance lease of the asset to a third partyagain, usually a connected party; perhaps another group companyand then take the asset back from that third party on a long funding operating lease under the Finance Act 2006. The combined accounting treatment lead to the owner receiving capital allowances equal to the market value of the asset that he was still using under the operating lease. The mechanics of the scheme seemed to turn on the fact that, by selling the rentals first, the net investment that has to be recognised for accounting purposes at step 2on the grant of the finance leaseis greatly and artificially devalued. However, on taking the asset back under the operating lease, the owner is deemed to incur expenditure equal to the
Secondly, where an asset had appreciated in value, it could be advantageously sold and leased back under a long funding lease because the sale proceeds could be limited to the unappreciated value. However, the capital allowances under the lease back would accrue to the former owner at the current market value, thereby giving an uplift. Thirdly, before 13 November 2008, at the end of a lease, the asset owner could avoid bringing any disposal value into account if a residual value guarantee agreement was in place. Fourthly, a leasing company that is part of a group could avoid the charge imposed under schedule 10 to the 2006 Act if it wished to leave the group by selling its assets and leasing them back, so that it ceased to own them in that sense for tax purposes. The book value of such a company for schedule 10 purposes was thereby depressed.
Schedule 32 will operate as follows. Paragraphs 1 to 5 prescribe the current market value of the asset to be the disposal value on the grant of a long funding finance lease, thereby targeting steps 1 and 2 of the first scheme that I outlined, as well as the second scheme. The concept of net investment is abolished. Paragraphs 6 to 8 effectively prescribe the disposal value on lease termination for the purposes of calculating the balancing charge, so that a disposal value has to be brought into account regardless of any guarantee arrangement. That will put a stop to the third scheme.
Paragraphs 8 to 11 provide that if the capital payment made on the grant of a long funding lease is brought into account as a disposal value, to the extent that it is so brought into account, it will not bear income tax under section 785C of the Income and Corporation Taxes Act 1988. That appears to be a tidying up exercise that will assist taxpayers. Paragraphs 12 to 14 will prevent the annual investment allowance and first year allowance being claimed by the lessees. Paragraphs 15 to 17 deal with leases made in favour of connected personsproviding a further impediment to the first schemebut they are principally aimed at ensuring that market value is used for schedule 10 purposes where the owner has become lessee of his own assets. Paragraphs 18 and following repeat the exercise for plant and machinery taken on hire purchase agreements. All in all, there is nothing here of great controversy and I can see nothing that the Opposition would oppose.
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