|
Clause 892: Deduction where failure to make relevant capital payment expected
2651. This clause gives relief for bad debts, or debts which are expected to be bad. It is based on section 785E of ICTA.
2652. As clause 890 may tax a relevant capital payment before it is received, relief is to be given at the time the lessor reasonably expects that some or all of the relevant capital payment will not be paid. This rule applies whether the payment was due to be made to the lessor or to someone on their behalf.
Clause 893: Meaning in Chapter of “Capital payment”, “relevant capital payment” etc
2653. This clause defines “relevant capital payment” and related terms. It is based on section 785C(2) and (6) to (10) of ICTA.
2654. Subsection (2) defines the term “capital payment”. It excludes any payment that would fall to be included in calculating the lessor’s income for corporation tax purposes or any payment in respect of a long funding finance lease which would be so included but for the fact that clause 360 ensures that only sums treated as the gross return on investment or as interest in respect of the lease are taxed. Subsection (2), therefore, ensures that no part of the rentals under a long funding finance lease triggers clause 890.
2655. Clause 890 is only triggered if the capital payment is “relevant” as defined in subsections (3) to (5). But a capital payment which falls within those subsections is not relevant to the extent that it falls within subsection (6) and is only relevant to a limited extent if it falls within subsection (7).
2656. Payment is given an extended meaning for the purposes of the Chapter (see subsections (8) and (9)).
Clause 894: Other interpretation of Chapter
2657. This clause defines other terms used in the Chapter. It is based on section 785C(1) and (3) to (5).
2658. The effect of subsections (3) to (5) is that a “lease of plant or machinery” includes:
- a lease of plant or machinery only;
- a lease of plant or machinery that is not a fixture where it is leased with land or other assets in circumstances where income attributable to the plant or machinery would not be chargeable to tax as profits of a UK property business (in which case see clause 891).
but does not include:
- a lease of land and buildings, including fixtures and other plant or machinery the income from which would be taxed as property income; or
- plant or machinery leased out under a long funding lease where the lessor would have been entitled to claim capital allowances but for section 34A of CAA.
Part 21: Leasing arrangements: finance leases and loans
Overview
2659. This Part is based on Schedule 12 to FA 1997.
2660. Schedule 12 to FA 1997 has effect for both corporation tax purposes and income tax purposes. Schedule 12 is rewritten for corporation tax purposes in this Bill and for income tax purposes in Part 11A of ITA (see Schedule 3 to TIOPB, which also rewrites provisions of Schedule 12 relating to chargeable gains in TCGA).
2661. Schedule 12 to FA 1997 was introduced to deal with two finance leasing arrangements. Schedule 12 achieves its aims by aligning the tax treatment of the return in respect of finance leases and loans more closely with the commercial accounting treatment.
2662. Part 1 of Schedule 12 (rewritten in Chapter 2) counters tax avoidance by finance lessors trying to turn some of their lease rental income into capital receipts (taxed later and at lower effective rates, if at all). It ensures that any part of the capital receipt which is recognised as return on investment under GAAP is brought into account for tax purposes as income.
2663. Part 2 of Schedule 12 to FA 1997 (rewritten in Chapter 3) deals with a possible deferral of tax liability by means of leases under which rentals are concentrated towards the end of the lease term. But for the provisions of Schedule 12, rental income in the case of such a finance lease could be recognised for tax purposes later than it is recognised in accordance with GAAP.
Chapter 1: Introduction
Overview
2664. This Chapter not only gives an overview of the Part but also brings to prominence the definitions of certain terms fundamental to its provisions.
Clause 895: Overview of Part
2665. This clause describes the Part and the contents of each Chapter. It is new.
Clause 896: Normal rent
2666. This clause defines “normal rent”. It is based on paragraph 20 of Schedule 12 to FA 1997.
2667. Normal rent is the amount which but for this Part a lessor would bring into account as rent from a lease for the purposes of corporation tax.
Clause 897: Accountancy rental earnings
2668. This clause defines “accountancy rental earnings”. It is based on paragraph 21 of Schedule 12 to FA 1997.
2669. This Part provides that the accountancy rental earnings of a lessor in relation to a lease are, in certain circumstances, to be brought into account for corporation tax purposes instead of the normal rent from the lease.
2670. Subsections (1) and (2) provide that in relation to a lease “accountancy rental earnings” are the highest of the following three figures for a period of account:
- the rental earnings (see clause 898) of the lessor in relation to the lease;
- the rental earnings of a connected person of the lessor in relation to the lease; or
- the rental earnings in relation to the lease for the purposes of consolidated accounts of the group of which the lessor is a member.
2671. The purpose of taking the highest of the three figures is to ensure that the earnings fully reflecting the economic substance of the transaction are taxed. This is especially important when the capital sum which is an essential part of a leasing arrangement within Chapter 2 may be received not by the lessor but by a related party. In such a case it is only by considering the lessor’s position and that of the related party together that the true economic substance of the transaction can be appreciated. That is likely to be in the consolidated accounts of the group as a whole, or possibly in the accounts of the related party, rather than in those of the lessor company itself.
Clause 898: Rental earnings
2672. This clause defines “rental earnings”. It is based on paragraph 22 of Schedule 12 to FA 1997.
Chapter 2: Finance leases with return in capital form
Overview
2673. This Chapter is concerned with finance leases intended to turn part of the associated rental income into capital receipts.
Clause 899: Arrangements to which this Chapter applies
2674. This clause describes the leasing arrangements that fall within Chapter 2. It is based on paragraphs 1(1) and 2(1) of Schedule 12 to FA 1997.
2675. The arrangements fall within the Chapter if they involve the lease of any property or rights (see subsection (1) and the definition of “asset” in clause 937). Contrast Parts 9 and 20 which apply only to leases of plant or machinery.
2676. The Chapter is only capable of applying if two conditions are met. First, the arrangements must fall to be treated under GAAP as a finance lease or loan (see subsection (2)). Second, it is necessary that some or all of the lessor’s return on investment in respect of the finance lease or loan is not in the form of rent and would not, apart from this Part or Part 11A of ITA, be brought into account for tax purposes as rent (see subsection (3)).
2677. References to Part 11A of ITA and to tax purposes (rather than only corporation tax purposes) have been included in subsection (3) to ensure that the division between that Part of ITA and this Part works as intended.
2678. The Chapter is capable of applying to arrangements entered into before the commencement date of Schedule 12 to FA 1997 (see subsection (4)(a) and the commentary on clause 923).
Clause 900: Purposes of this Chapter
2679. This clause sets out the main purposes of Chapter 2. It is based on paragraph 1(2) of Schedule 12 to FA 1997.
2680. The first purpose (in subsections (2) to (4)) is to substitute for the ordinary tax measure of income from the lease the amount recognised in accordance with GAAP where this is larger than the normal measure (see clause 905).
2681. Under GAAP, part of the sum mentioned in clause 899(3) is recognised as annual income over the course of the lease and thus taken into account in computing commercial profits. Income is recognised in this way because in substance the lease is tantamount to a loan, the interest on which needs to be matched with the lessor’s own borrowing costs in order properly to reflect the lessor’s profit.
2682. The income recognised in accordance with GAAP may be that shown in consolidated accounts of the lessor’s group or in those of a company which is a “connected person” of the lessor. The reason for looking wider than the lessor (see subsection (4)) is that the full earnings from the lease may only be shown in, say, the accounts of the parent or in the consolidated group results.
2683. The second purpose of Chapter 2 (in subsections (5) and (6)) is to recover appropriately any tax reliefs for capital expenditure already given.
Clause 901: Application of this Chapter
2684. This clause, together with clause 902, determines whether Chapter 2 applies to a particular lease. It is based on paragraph 2 of Schedule 12 to FA 1997.
2685. For the Chapter to apply, the conditions in clause 902 must have been met in relation to the lease at some time in a period of account of the current lessor (see subsection (1)(b)). But once they have been met in relation to the lessor at the time, they are treated as continuing to be met as regards any subsequent lessor unless and until the lease is assigned to a wholly unrelated person (see subsections (3) to (5)).
2686. Subsection (2) provides that the Chapter does not apply to long funding leases of plant or machinery in relation to which Part 2 of CAA gives capital allowances to the lessee instead of the lessor. The provisions rewritten in Chapter 2 of Part 9 of this Bill set out the basis of taxation of rental earnings under such leases.
2687. Subsection (6) is a necessary consequence of the split into separate provisions for corporation tax purposes and income tax purposes.
Clause 902: The conditions referred to in section 901(1)
2688. This clause sets out the five conditions, A to E, all of which must be met if Chapter 2 is to apply to a specific lease. It is based on paragraph 3(1) to (5) of Schedule 12 to FA 1997.
2689. Condition A in subsections (2) to (4) requires the lease to fall to be treated under GAAP as a finance lease or loan.
2690. Condition B in subsection (5) requires a “major lump sum” which is not rent to be payable and for part of that sum to be treated under GAAP as return on investment in respect of the finance lease or loan.
2691. Condition C in subsection (6) is that not all of that part of the major lump sum would apart from Chapter 2 be brought into account for corporation tax purposes as the “normal rent” (see clauses 896 and 903(3)) from the lease for accounting periods ending with “the relevant accounting period” (see clause 903(1)).
2692. Condition D in subsection (7) is that for the period of account of the lessor in which “the relevant time” (see clause 903(1)) falls or for an earlier period of account of the lessor, the “accountancy rental earnings” (see clause 897) in respect of the lease exceed the normal rent for the period. The point of this condition is that, if a lessor is consistently being taxed on at least as much income as the commercial accounts show, then the terms of the lease are not ones which are designed to turn rental income into a capital receipt.
2693. Condition E in subsection (8) is that at the relevant time there exist such arrangements or circumstances as are mentioned in clause 904.
2694. The arrangements and circumstances are set out in detail in clause 904, but essentially there must be some likelihood that the lessee or a connected person of the lessee will buy out the lessor’s interest in the leased asset for a major lump sum.
2695. Condition E is intended to ensure that a lease does not come within Chapter 2 solely because there is a possibility that the lessor may obtain a major capital sum otherwise than from the lessee or a connected person. This might happen for example on the unplanned sale of the leased asset to a third party or on a claim under an insurance policy on the destruction of the asset.
Clause 903: Provisions supplementing section 902
2696. This clause provides the meanings of “the relevant accounting period” and “the relevant time” and sets out how the normal rent is to be determined, for the purposes of clause 902. It is based on paragraph 3(7) and (8) of Schedule 12 to FA 1997.
Clause 904: The arrangements and circumstances referred to in section 902(8)
2697. This clause sets out the arrangements and circumstances which constitute Condition E in clause 902(8). It is based on paragraph 4 of Schedule 12 to FA 1997.
2698. See the commentary on clause 902.
Clause 905: Current lessor taxed by reference to accountancy rental earnings
2699. This clause provides for the lessor to bring into account for corporation tax purposes the accountancy rental earnings in respect of the lease for a period of account if they exceed the normal rent for the period. It is based on paragraph 5 of Schedule 12 to FA 1997.
Clauses 906 to 910: Reduction of taxable rent by cumulative rental excesses
Overview
2700. These clauses ensure that the rule in clause 905 that the higher of the accountancy rental earnings and the normal rents (ordinary taxable rents) are taxed does not overall cause more rent to be taxed as income than is actually due to the lessor. They are based on paragraph 6 of Schedule 12 to FA 1997.
2701. These clauses achieve their purpose by requiring running totals to be kept of aggregate differences between accountancy rental earnings and the normal rents. Any aggregate excess of accountancy rental earnings over normal rents arising in past periods can then be set against any current excess of normal rents over accountancy rental earnings. Conversely, any aggregate excess of normal rents over accountancy rental earnings arising in past periods can be set against any current excess of accountancy rental earnings over normal rents.
2702. The provisions of paragraph 6 of Schedule 12 to FA 1997 have been unpacked into five clauses to provide greater clarity.
Clause 906: Reduction of taxable rent by cumulative rental excesses: introduction
2703. This clause introduces clauses 907 to 910. It is based on paragraph 6(5) to (9) of Schedule 12 to FA 1997.
Clause 907: Meaning of “accountancy rental excess” and “cumulative accountancy rental excess”
2704. This clause defines the terms “accountancy rental excess” and “cumulative accountancy rental excess”. It is based on paragraph 6(3), (4) and (8) of Schedule 12 to FA 1997.
Clause 908: Reduction of taxable rent by the cumulative accountancy rental excess
2705. This clause applies if in relation to a lease for a period of account the normal rent exceeds the accountancy rental earnings (so it is the normal rent that is taxed) and there is a cumulative accountancy rental excess. It is based on paragraph 6(5) and (6) of Schedule 12 to FA 1997.
2706. The rent that is brought into account for corporation tax purposes is found by reducing normal rent by the cumulative accountancy rental excess but not so as to bring into account an amount less than the accountancy rental earnings for the period.
Clause 909: Meaning of “normal rental excess” and “cumulative normal rental excess”
2707. This clause defines the terms “normal rental excess” and “cumulative normal rental excess”. It is based on paragraph 6(1), (2) and (6) of Schedule 12 to FA 1997.
Clause 910: Reduction of taxable rent by the cumulative normal rental excess
2708. This clause applies if in relation to a lease for a period of account the taxable rent under clause 905 would be the amount of the accountancy rental earnings and there is a cumulative normal rental excess. It is based on paragraph 6(7) and (8) of Schedule 12 to FA 1997.
2709. Clause 905 only applies if the accountancy rental earnings exceed the normal rent. To avoid more rent being taxed as income for the period than is actually due to the lessor where there is a cumulative normal rental excess for the period, the rent that is brought into account for corporation tax purposes is found by reducing the accountancy rental earnings by the cumulative normal rental excess, but not so as to bring into account an amount less than the normal rent for the period.
Clauses 911 to 914: Relief for bad debts by reduction of cumulative rental excesses
Overview
2710. These clauses are concerned with bad debts. Broadly, the aim is to ensure that any bad debts are sensibly taken into account in calculating taxable profits and accountancy rental excesses and normal rental excesses. If the lease runs its course, the net rents taxed should equal the net rents payable after allowing for any bad debts.
Clause 911: Relief for bad debts: reduction of cumulative accountancy rental excess
2711. This clause deals with a bad debt deduction in respect of rent under a lease for a period of account if there is a cumulative accountancy rental excess for the period. It is based on paragraph 9(1) to (4) and (7) of Schedule 12 to FA 1997.
2712. Subsection (2) reduces the cumulative accountancy rental excess for a period where the accountancy rental earnings exceed normal rent by an amount equal to the excess of the bad debt deduction over the accountancy rental earnings.
2713. Subsection (3) deals with the converse situation if, for a period of account, normal rent is at least equal to accountancy rental earnings (so that it is the normal rent which is taxed). In those circumstances there are two restrictions.
2714. Subsection (4) provides that relief otherwise available under clause 908(2) in a period for any cumulative accountancy rental excess brought forward from previous periods is restricted to any excess of the normal rent over any bad debt deduction given in respect of rents from the lease. That is because only the normal rent net of bad debt relief is in effect being brought into account for tax.
2715. Subsection (5) applies if the bad debt deduction exceeds the normal rent for a period of account. In such a case any cumulative accountancy rental excess brought forward from previous periods is reduced by the amount by which the bad debt deduction exceeds the normal rent. That is because the excess of the bad debt deduction over the normal rent for the period of account already represents relief for rents taxed in previous periods.
Clause 912: Recovery of bad debts following reduction under section 911
2716. This clause reinstates any relief for cumulative accountancy rental excess reduced under clause 911 if the bad debt deduction is subsequently reversed (because the debt is recovered or prospects for its recovery improve). It is based on paragraph 9(5) to (7) of Schedule 12 to FA 1997.
Clause 913: Relief for bad debts: reduction of cumulative normal rental excess
2717. This clause deals with the interaction of bad debt deductions and relief for cumulative normal rental excess under clause 910. It is based on paragraph 10(1) to (4) and (7) of Schedule 12 to FA 1997.
2718. As with clause 911, the rationale is that the relief should only represent an excess of normal rent over accountancy rental earnings which have effectively been brought into account for tax and that the relief should only be given against rents similarly brought into account.
2719. The structure of the detailed rules is identical with that in clause 911.
Clause 914: Recovery of bad debts following reduction under section 913
2720. This clause reinstates any relief for cumulative normal rental excess reduced under clause 913 if the bad debt deduction is subsequently reversed (because the debt is recovered or prospects for its recovery improve). It is based on paragraph 10(5) to (7) of Schedule 12 to FA 1997.
Clause 915: Effect of disposals of leases: general
2721. This clause treats a period of account of the lessor as coming to an end for the purposes of this Part immediately before any disposal of the lessor’s interest under the lease, the leased asset or an asset representing the leased asset. It is based on paragraph 12(5) to (7) of Schedule 12 to FA 1997.
2722. This enables the cumulative accountancy rental excess or the cumulative normal rental excess for the period of account of the lessor that then begins, and in which the disposal takes place, to be calculated.
2723. The remaining sub-paragraphs of paragraph 12 of Schedule 12 to FA 1997 are rewritten as section 37A of TCGA by Part 2 of Schedule 3 to TIOPB. See the commentary on that Schedule to TIOPB. Subsection (5) provides a signpost to that section.
Clause 916: Assignments on which neither a gain nor a loss accrues
2724. This clause deals with the assignment of a lease in circumstances which are regarded for the purposes of corporation tax on chargeable gains as giving rise to neither a gain nor a loss. It is based on paragraph 7 of Schedule 12 to FA 1997.
2725. Paragraph 7(2) of Schedule 12 to FA 1997, on which subsection (2) is based, provides for a period of account of the assignor to end and a period of account of the assignee to begin with the assignment.
2726. Paragraph 7(3) of Schedule 12 to FA 1997 provides that the assignee takes over the assignor’s “unused cumulative accountancy rental excess” or “unused cumulative normal rental excess”.
2727. These “unused” cumulative excesses are the aggregate of the cumulative rental excess for the period of the assignor which ends with the assignment and any rental excess for that period.
2728. But the combined effect of clause 915(2) (based on paragraph 12(5) of Schedule 12 to FA 1997) and subsection (2) is that the period of account of the assignor which ends with the assignment is infinitesimally short. There can, therefore, in practice be no accountancy rental excess or normal rental excess for that period.
2729. Accordingly, in rewriting paragraph 7(3) of Schedule 12 to FA 1997 in subsections (3) and (4), the provision has been simplified by referring only to the cumulative accountancy rental excess or the cumulative normal rental excess for that period.
2730. Subsection (5) ensures that the division of the income tax provisions in Part 11A of ITA and the corporation tax provisions in this Part works as intended.
| 
