Introduction Background Note
28.The sale of lessor companies legislation prevents a potential loss of tax when a lessor company changes hands. Tax could be lost if a lessor company with deferred tax profits is sold to a loss-making concern that is able to utilise its own losses against the deferred tax profits of the lessor company. A sale to a loss-making concern is deterred by the legislation through the imposition of a charge that is matched by a relief; the charge affecting the selling group and the relief benefiting the buying group. Where the lessor company is sold to a profit-making concern the relief is valuable and the buyer will pay enough for the shares in the lessor company to compensate the seller for the imposition of the charge. Where the lessor company is sold to a loss-making concern the relief brings no benefit and the buyer is not willing to pay enough to compensate the seller.
29.It has become clear that in some limited circumstances the legislation can act as a deterrent in cases where there is no tax avoidance motive. Typically, this is because the buyer is not a loss-making concern but, as a consequence of a temporary dip in profitability or as a consequence of the particular nature of the buying entity, it is not able to utilise the relief efficiently.
30.This Schedule introduces an option to elect for an alternative treatment which replaces the charge and relief with a ring fence that preserves the profits of the leasing business by restricting the set off of losses, preventing the fragmentation of the business without tax effect and the reduction of the profits of the business through additional claims to capital allowances and the creation of artificial deductions. As a consequence of these restrictions tax is collected on the deferred profits over time.
31.The election offers an alternative where Schedule 10 acts as a barrier to a commercially motivated sale while ensuring that the incentive to sell a lessor company to a loss-making concern is not reinstated.