Introduction Details of the Schedule
4.Paragraph 1 of the Schedule is concerned with the restriction of qualifying expenditure in case of certain leased assets
5.Paragraph 1(1) inserts new section 228MA (Restriction of qualifying expenditure) into the Capital Allowances Act 2001 (CAA).
6.Section 228MA of CAA is the main new substantive section. It limits the amount of capital expenditure that is treated as qualifying expenditure and so limits the amount on which a lessor may claim capital allowances.
7.Subsection (1) provides that the section applies where there are arrangements under which plant or machinery is to be leased and there are arrangements under which the value of the asset to the lessor (“V”) is reduced. Subsection (1) will apply when the lessor is treated as incurring capital expenditure under section 67 of CAA (hire purchase etc) or under section 70A of CAA (long funding leases).
8.Subsection (2) restricts the amount of the lessor’s qualifying expenditure to “V”.
9.Subsection (3) defines “V” as the aggregate of the amount of the present value of the lessor’s income from the asset and the amount of the present value of the residual value of the asset after any rental rebate.
10.Subsection (4) defines the lessor’s income from the asset for the purposes of determining “V”, to include all amounts that it is reasonable to expect the lessor will receive in connection with the lease and which will be taxed as income (this includes amounts treated as income, for example under section 890 of the Corporation Tax Act (CTA) 2010). The subsection also defines the residual value as the market value (which is defined in section 577 of CAA) of the lessor’s interest in the asset immediately after the termination of the lease. The reference to “lessor’s interest” caters for the situation where the lessor is the beneficiary of a contract under section 67 of CAA or a lessee under a long funding lease.
11.Subsection (5) excludes from the lessor’s income amounts which have been brought into account as disposal receipts for capital allowances purposes, charges made by the lessor for services supplied in connection with the leased asset and qualifying UK and foreign tax paid by the lessor.
12.Subsection (6) caters for the possibility that the lessor incurs the capital expenditure in instalments and ensures it operates in a cumulative fashion.
13.Subsection (7) introduces new sections 228MB and 228MC of CAA.
14.Subsection (8) defines a “lease” for the purposes of this section and new sections 228MB and 228MC.
15.New section 228MB of CAA explains how the present value is to be calculated. In the case of both the amounts receivable in connection with the lease and the residual value at the end of the lease term the present value is based on the interest rate implicit in the lease, but it provides for an alternative (London interbank offered rate plus 1 per cent) if the rate cannot otherwise be established.
16.New section 228MC of CAA defines rental rebate for the purpose of new section 228MA. The definition is largely based on the definition in section 70YH of CAA.
17.Paragraph 2 of the Schedule is concerned with the restriction of deduction for rental rebate.
18.Paragraph 2(1) inserts new section 55B into the Income Tax (Trading and Other Income) Act 2005 (ITTOIA).
19.New section 55B of ITTOIA applies for the purpose of income tax and operates in essentially the same way as the new rules for corporation tax. Section 55B is drafted in materially identical terms to new section 60A of CTA 2009 (inserted by paragraph 2(2) of the Schedule). HM Revenue & Customs anticipates that the new rules are more likely to apply to companies and so the detailed explanatory notes are provided for new section 60A of CTA 2009.
20.Paragraph 2(2) of the Schedule inserts new section 60A (rental rebates) into CTA 2009.
21.New section 60A of CTA 2009 restricts the amount of deduction allowed for a rebate of rentals.
22.Subsection (1) limits the deduction to the amount of the lessor’s income from the lease, which is defined in subsection (4), excluding the finance charge element of finance lease rentals.
23.Subsections (2) and (3) explain what is meant by a rental rebate. The definition is largely based on the definition in section 70YH of CAA.
24.Subsection (4) defines the lessor’s income from the lease to include all amounts that it is reasonable to expect the lessor will receive in connection with the lease and which will be taxed as income (this includes amounts treated as income, for example under section 890 of CTA 2010 but it excludes any amount brought in as a disposal receipt. The subsection also defines the finance charge element of the lease rentals which is excluded from income for the purpose of this section.
25.Subsection (5) provides that where there has been a transfer to which section 948 of CTA 2010 applies, or where an election has been made under section 266 of CAA, new section 60A applies as if the successor had done everything done by the predecessor.
26.Subsection (6) provides that all or part of the amount of a rental rebate that has been disallowed may be treated as an allowable loss for chargeable gains purposes. The amount which may be treated that way is the lower of the amount which has been disallowed and the amount by which the rental rebate exceeds the capital expenditure incurred by the lessor.
27.Paragraph 3 of the Schedule concerns arrangements reducing the disposal value of an asset.
28.Paragraph 3(1) inserts new section 64A (leased assets: arrangements reducing disposal value of asset) into CAA.
29.New section 64A provides that arrangements which reduce the value of leased plant or machinery are to be ignored for the purpose of establishing items 1, 2 and 7 in the table in section 61(2) of CAA.
30.Subsection (1) provides that the section applies only where there are arrangements that have the effect of reducing the disposal value insofar as it is attributable to rentals payable under the lease.
31.Subsection (2) ensures that arrangements that reduce the disposal value are not ignored where the arrangements comprise the transfer of an income steam, the value of which is taxed as income under section 809AZA of the Income Tax Act 2007 or section 752 of CAA 2010.