Clause 860: Relevant corporation tax relief

2558.     This clause defines deductions by way of relevant corporation tax relief. It is based on sections 779(13) and 780(1) of ICTA.

2559.     This clause omits references to a profession and to a vocation where the source legislation refers to the carrying on by a company of a trade, profession or vocation. See the commentary on clause 837 and Change 4 in Annex 1.

Clause 861: Linked persons

2560.     This clause defines “a person linked to L” in this Chapter. It is based on section 780(7) of ICTA.

Clause 862: Lease, lessee, lessor and rent

2561.     This clause concerns the meaning of “lease”, “lessee”, “lessor” and “rent”. It is based on sections 24(1) and (6) and 780(8) of ICTA.

2562.     Section (3) says that “lease” does not include a mortgage. This is based on section 24(1) of ICTA as applied by section 780(8) of ICTA. In fact, section 24(1) of ICTA says that a lease includes neither a mortgage nor a heritable security. A “heritable security” is the Scottish equivalent of a mortgage, although post-1970 heritable securities take the form of a standard security. Clause 1166 contains a general provision to the effect that, in the application of the Bill to Scotland, “mortgage” includes the Scottish equivalents. Accordingly, subsection (3) has to be read as if it said that a lease includes neither a mortgage nor the Scottish equivalents. Subsection (3) therefore achieves the same effect as the source legislation, even though clause 1166 has a definition of the Scottish equivalents that contains more detail than the words “mortgage or heritable security” in section 24(1) of ICTA. The approach is the same as that taken for income tax purposes when the definition of “lease” in section 24(1) of ICTA was rewritten to sections 364(1) and 879(1) of ITTOIA.

Chapter 3: Leased trading assets

Overview

2563.     This Chapter is based on sections 782 and 785 of ICTA.

2564.     This Chapter applies where a company carrying on a trade pays rent under a lease of an asset other than land or buildings and at any time before the lease was created the asset was used either (a) in that trade or (b) in another trade carried on by the person who then or later was carrying on the first trade and, in either case, when so used was owned by the company carrying on the trade in which it was used.

2565.     If this Chapter applies, it provides that in computing the profits and gains of the trade the deduction in respect of a payment under the lease shall not exceed the commercial rent of the asset for the period for which the payment was made.

2566.     This Chapter has the following structure.

• Clause 863 summarises the Chapter.

• Clause 864 states when the Chapter applies.

• Clause 865 restricts corporation tax relief and carries forward relief which has been denied.

• Clauses 866 and 867 supplement clause 865.

• Clauses 868 and 869 are interpretative.

Clause 863: Overview of Chapter

2567.     This clause summarises this Chapter. It is new.

2568.     The word “lease” appears in this clause for the first time in this Chapter. It is defined in clause 868.

Clause 864: Leased trading assets

2569.     This clause states when this Chapter applies to a payment. It is based on section 782(1) and (8) to (10) of ICTA.

2570.     Subsection (1) introduces the three conditions relating to the application of this Chapter and explains their logical relationship.

2571.     Subsection (2) specifies condition A, concerning the payment.

2572.     In particular, under subsection (2)(a) the payment must be made under the lease of a “relevant asset”. The expression “relevant asset” appears in subsection (2)(a) for the first time in this Chapter. It is defined in clause 869.

2573.     Subsections (3) and (4) specify conditions B and C. These are two alternative conditions concerning the use to which the leased asset was put before it was leased.

2574.     Subsections (2)(b), (3)(a) and (b) and (4)(c) omit references to a profession and to a vocation where the source legislation refers to the carrying on by a company of a trade, profession or vocation. See the commentary on clause 837 and Change 4 in Annex 1.

2575.     Subsection (5) preserves the rule that, if the lease was created before the legislation was first introduced, a lease-back after that date will not activate the legislation.

Clause 865: Tax deduction not to exceed commercial rent

2576.     This clause restricts corporation tax relief and carries forward relief which has been denied. It is based on section 782(1) to (4) of ICTA.

2577.     Subsection (3) brings the law into line with practice. See the commentary on clause 838 and Change 55 in Annex 1.

Clause 866: Long funding finance leases

2578.     This clause makes an exception for long funding finance leases. It is based on section 782(1A) of ICTA.

Clauses 867 and 868: Commercial rent; lease

2579.     These interpretative clauses are based on sections 782(6) and (7) and 785 of ICTA.

Clause 869: Relevant asset

2580.     This clause defines “relevant asset” for the purpose of this Chapter. It is based on the definition of “asset” in section 785 of ICTA.

2581.     The source legislation uses the term “asset”, which is defined to exclude land and interests in land. Since many readers may find this counter-intuitive, this clause uses the new term “relevant asset”.

Chapter 4: Leased assets: capital sums

Overview

2582.     This Chapter is based on section 781 of ICTA.

2583.     It deals with cases such as that of a taxpayer which, having had tax relief in respect of a payment under a lease of an asset other than land or buildings, receives or has received at any time a capital sum in respect of the lessee’s interest in the lease.

2584.     If the Chapter applies, corporation tax is charged on (broadly speaking) the amount on which relief has been obtained or, if less, on the capital sum.

2585.     The Chapter has the following structure.

• Clause 870 summarises the Chapter.

• Clauses 871 to 873 state when the Chapter applies.

• Clauses 874 to 876 concern the charge to corporation tax.

• Clauses 877 to 879 deal with obtaining the capital sum.

• Clauses 880 and 881 are about apportionment.

• Clauses 882 to 886 are interpretative.

Clause 870: Overview

2586.     This clause summarises the Chapter. It is new.

2587.     The expressions “capital sum” and “lease” appear in this clause for the first time in this Chapter. They are defined in clauses 883 and 884 respectively.

Clause 871: Application of the Chapter

2588.     This clause introduces the five conditions relating to the application of this Chapter and explains their logical relationship. It is based on section 781(1) of ICTA.

Clause 872: Payment under lease

2589.     This clause specifies a necessary condition (condition A) for the Chapter to apply, namely that a tax-deductible payment is made under a lease of a relevant asset. It is based on sections 781(1) and (3) and 782(1) of ICTA.

2590.     The expressions “relevant asset” and “relevant tax relief” appear in subsection (1)(a) and (b) respectively for the first time in this Chapter. They are defined in clauses 885 and 886 respectively.

2591.     The person entitled to a deduction by way of tax relief under section 781(1)(a) of ICTA is not necessarily the person obtaining the capital sum and charged to tax under that subsection. It follows that, if the person obtaining the capital sum is charged to corporation tax, the person entitled to a deduction by way of tax relief is not necessarily a corporation tax payer. Subsection (1)(b) of this clause therefore refers to “relevant tax relief”, rather than “relevant corporation tax relief”.

2592.     Subsection (2) stipulates that if Chapter 3 of this Part applies to the payment then condition A is not met (and, therefore, this Chapter does not apply to the payment). For that reason, Chapter 3 appears in this Part before this Chapter, reversing the order of the source legislation.

2593.     Subsection (3) similarly stipulates that if Chapter 3 of Part 12A of ITA (the income tax provision corresponding to Chapter 3 of this Part) applies to the payment then condition A is not met (and, therefore, this Chapter does not apply to the payment). Subsection (3) is unlikely to apply in practice, but omitting it would change the law to the taxpayer’s disadvantage.

2594.     Subsection (4) preserves the rule that, if the lease was created before the legislation was first introduced, receiving a capital sum after that date will not activate the legislation.

Clause 873: Sum obtained

2595.     This clause specifies four alternative additional conditions for the Chapter to apply. It is based on sections 781(1) and (9) and 783(3) of ICTA.

2596.     All four of the conditions concern the obtaining of a capital sum by a person of the description specified in the condition. In particular, the person obtaining the capital sum need not be the person making the tax-deductible payment.

2597.     In conditions B and C in subsections (1) and (2), the capital sum is obtained in respect of the lessee’s interest in the lease. In condition B, the capital sum is obtained by the person making the payment. In condition C, the capital sum is obtained by an associate of that person.

2598.     Subsection (1)(a) is the first provision in this Chapter which refers to obtaining a sum in respect of an interest in a lease and, specifically, to obtaining a sum in respect of the lessee’s interest in a lease. The former expression is defined in clause 877. The latter expression is defined in clause 878.

2599.     The word “associate” appears in subsection (2) for the first time in this Chapter. It is defined in clause 882.

2600.     In conditions D and E in subsections (3) and (4), the capital sum is obtained in respect of the lessor’s interest in the lease, or of any other interest in the asset. In condition D, the capital sum is obtained by an associate of the person making the payment. In condition E, the interest belongs to an associate of that person and the capital sum is obtained by an associate of that associate.

2601.     Subsection (5) makes it clear that, for the purposes of this clause, it is irrelevant when the payment is made.

2602.     Subsections (6) and (7) relate to hire-purchase agreements for plant and machinery. Subsection (6) makes an exception to conditions B and C. Subsection (7) makes an exception to conditions D and E.

Clause 874: Charge to corporation tax

2603.     This clause imposes the charge to corporation tax on the company obtaining the capital sum. It is based on sections 781(1), (1B), (2) and (6) of ICTA.

2604.     Under subsection (1), there is a charge to corporation tax on income for the accounting period in which the sum is obtained.

2605.     Subsection (2) measures the amount on which tax is charged.

2606.     Subsection (3) introduces four subsections limiting the effect of subsections (1) and (2).

2607.     Subsection (4) caps the amount on which tax is charged.

2608.     To prevent double taxation, subsections (5) and (6) ensure that once a payment (or part of a payment) has been taken into account in making a charge under this clause it cannot be taken into account in making a further charge in respect of another sum.

2609.     Subsection (7) is a timing rule supplementing subsections (5) and (6).

Clause 875: Hire-purchase agreements

2610.     This clause concerns hire-purchase agreements. It is based on section 784 of ICTA.

2611.     This clause may be in point if clause 873(6) and (7) (sum obtained: exceptions for hire-purchase agreements) do not prevent this Chapter from applying. If this Chapter applies, subsection (1) states the conditions for this clause to apply.

2612.     Subsection (2) requires the total to be found of:

• non-tax-deductible payments under the lease; and

• if the lessee’s interest in the lease was assigned to the company before it obtained the capital sum in respect of that interest, any capital payment made by the company as consideration for the assignment.

2613.     This total is then compared with the capital sum. If it is equal to or greater than the capital sum, then under subsection (3) the capital sum is treated for the purposes of clause 874(4) as £nil. If the total found under subsection (2) is less than the capital sum, then under subsection (4) it is deducted from the capital sum in applying clause 874(4).

2614.     Subsection (5) covers the special case in which the capital sum is the consideration for part only of the lessee’s interest in the lease.

2615.     Section 784(4) of ICTA provides that:

“the amount to be deducted .. shall be such proportion of the capital expenditure which is still unallowed as is reasonable” (emphasis added).

2616.     Rewriting this, subsection (5)(a) requires the unallowed amount to be reduced to a proportion which is not only reasonable but also just. This is a minor change in the law: see Change 33 in Annex 1.

2617.     To prevent double relief, subsections (6) and (7) ensure that if a payment has been taken into account under subsection (2) in respect of a capital sum it cannot be taken into account in respect of another capital sum.

2618.     Subsection (8) is a timing rule supplementing subsections (6) and (7).

Clause 876: Adjustments where sum obtained before payment made

2619.     This clause provides for adjustments to be made if a capital sum is obtained as mentioned in clause 873 and later a payment is made as mentioned in clause 872. It is based on section 781(7) to (8A) of ICTA.

Clause 877: Sum obtained in respect of interest

2620.     This clause is concerned with the meaning, in this Chapter, of “a sum obtained in respect of an interest in an asset”. It is based on section 783(1) and (2) of ICTA.

Clause 878: Sum obtained in respect of lessee’s interest

2621.     This clause is concerned with the meaning, in this Chapter, of “a sum obtained in respect of the lessee’s interest in a lease of an asset”. It is based on section 783(1) and (2) of ICTA.

Clause 879: Disposal of interest to associate

2622.     This clause determines the amount which a company is deemed to obtain if it disposes of an interest in an asset to a person who is the company’s associate. It is based on sections 781(1) and 783(4) and (5) of ICTA.

Clause 880: Apportionment of payments made and of sums obtained

2623.     This clause provides for apportionments to be made of payments made and sums obtained. It is based on section 783(6) to (8) of ICTA.

2624.     Subsection (3) requires apportionments to be not only just but also reasonable. This is a minor change in the law. See Change 33 in Annex 1.

2625.     Subsections (4) and (5) omit references to a profession and to a vocation where the source legislation refers to the carrying on by a company of a trade, profession or vocation. See the commentary on clause 837 and Change 4 in Annex 1. This Change is not made in subsection (2), as the reference in that subsection to “relevant tax relief” is not limited to corporation tax.

Clause 881: Manner of apportionment

2626.     This clause provides for apportionments to be made by the tribunal in certain circumstances. It is based on section 783(9) of ICTA.

Clause 882: Associates

2627.     This clause defines “associates” for the purposes of this Chapter. It is based on section 783(10) and (11) of ICTA.

Clause 883: Capital sum

2628.     This clause defines “capital sum” for the purposes of this Chapter. It is based on the definition of “capital sum” in section 785 of ICTA.

2629.     Paragraph (a) omits references to a profession and to a vocation where the source legislation refers to the carrying on by a company of a trade, profession or vocation. See the commentary on clause 837 and Change 4 in Annex 1.

Clause 884: Lease

2630.     This clause defines “lease” for the purposes of this Chapter. It is based on the definition of “lease” in section 785 of ICTA.

Clause 885: Relevant asset

2631.     This clause defines “relevant asset” for the purposes of this Chapter. It is based on the definition of “asset” in section 785 of ICTA.

2632.     The source legislation uses the term “asset”, which is defined to exclude land and interests in land. Since many readers may find this counter-intuitive, this clause uses the new term “relevant asset”.

Clause 886: Relevant tax relief

2633.     This clause defines “relevant tax relief” for the purposes of this Chapter. It is based on section 781(4) of ICTA.

2634.     Paragraph (a) omits references to a profession and to a vocation where the source legislation refers to the carrying on by a company of a trade, profession or vocation. See the commentary on clause 837 and Change 4 in Annex 1.

Part 20: Tax avoidance involving leasing plant or machinery

Overview

2635.     This Part rewrites certain provisions of Part 17 of ICTA (tax avoidance) relating to leasing plant or machinery.

Chapter 1: Restrictions on use of losses in leasing partnerships

Overview

2636.     This Chapter rewrites sections 785ZA and 785ZB of ICTA, which were introduced by FA 2006 as an adjunct to the provisions of Schedule 10 to FA 2006 (sale etc of lessor companies etc) rewritten in Chapters 3 to 6 of Part 9.

2637.     These sections of ICTA address an alternative arrangement designed to achieve a similar effect to a disposal of an interest in a leasing business carried on in partnership, through differing allocations of profits and losses and of capital allowances in the leasing business.

Clause 887: When restrictions on leasing partnership losses under this Chapter apply

2638.     This clause sets out the circumstances in which the restrictions on the use of losses in clause 888 apply. It is based on sections 785ZA(1) to (4) and 785ZB(1) and (2) of ICTA.

2639.     The restrictions apply where a company carries on a “business of leasing plant or machinery” in partnership and the company’s profit sharing arrangements are unusual. Subsection (1)(e) achieves this by providing that the restrictions only apply if the profit sharing arrangements are not determined “on an allowable basis” as defined in subsections (2) to (4).

2640.     “Business of leasing plant or machinery” has the same meaning as it has for the purposes of Chapter 4 of Part 9 (see subsection (5)).

Clause 888: Restrictions on leasing partnership losses

2641.     This clause restricts the use of losses incurred by a company in the partnership leasing business. It is based on sections 785ZA(5) to (9) and 785ZB(1), (7) and (8) of ICTA.

2642.     A loss which derives from capital allowances on the leased plant or machinery may only be set off against the company’s income from leases of plant or machinery entered into by the partnership no later than the end of the accounting period in which the loss is incurred. It can be carried forward, but only against such leasing income (see subsection (2)). It cannot be set sideways (see subsection(3)) or surrendered as group relief (see subsection (4)).

Clause 889: Interpretation of Chapter

2643.     This defines certain terms used in the Chapter. It is based on section 785ZB(1) and (3) to (6) of ICTA.

Chapter 2: Capital payments in respect of leases treated as income

Overview

2644.     This Chapter rewrites sections 785B to 785E of ICTA introduced by FA 2008.

2645.     Only minor changes in language have been made but the provisions have been restructured to improve accessibility. In particular, section 785C (section 785B: interpretation) has been rewritten in two clauses. The first clause deals with the meaning of the primary terms “capital payment” and “relevant capital payment”, while the other defined terms are relegated to the second clause.

Clause 890: Capital payments in respect of leases treated as income

2646.     This clause taxes certain capital receipts arising in connection with leases of plant or machinery (such as premiums and similar sums) as income of the lessor. It is based on section 785B of ICTA.

2647.     The accounting period in which the charge to tax arises depends upon whether or not an unconditional obligation to make a “relevant capital payment” (see clause 893) is entered into before the relevant capital payment is made. See subsections (3) and (4).

Clause 891: Apportionments for leases of plant or machinery and other property

2648.     This clause ensures that clause 890 applies in a just and reasonable manner where the lease includes (but is not limited to) plant or machinery that is not a fixture. It is based on section 785D of ICTA.

2649.     Subsection (3) ensures that where the capital payment refers to plant or machinery, any income from which would be charged as profits of a UK property business, it is treated as referring to “other property” for the purpose of arriving at an apportionment under subsection (2). For example, if a lease of property includes furniture (and the income in respect of the furniture is taxed as property income) any element of the capital payment that refers to the furniture is outside the scope of clause 890.

2650.     The words “if the income (if any) .. is chargeable” in section 785D(3) of ICTA have been rewritten as “any income .. would be chargeable” in subsection (3), in order to remove any doubt that this treatment applies whether or not any income actually arises. This conforms the wording of subsection (3) with that of section 785C(4)(a) of ICTA rewritten in clause 894(4).