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FA 2011 analysis: Sale of lessor

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FA 2011 (s 32–33, Sch 6) provides further changes to the sale of lessor legislation as HMRC, faced with ongoing perceived avoidance, continue to tighten the drafting. The election to prevent a charge arising on a change of ownership has been removed. In addition, the anti-avoidance provisions have been extended in relation to whether a company is covered by the legislation and the calculation of the amount of the charge.

FA 2011 Sch 6 amends the provisions of CTA 2010 Part 9 Chapter 3 (Chapter 3).

Chapter 3 was designed to charge to tax the difference between the book value of leased plant and machinery and its tax written-down value (TWDV) on a sale of a lessor.

The policy intention was to prevent lessor groups from securing capital allowances without paying tax on the income derived from leasing (through selling the lessor to groups with losses).

The mirror provisions to cover leasing by way of a partnership are not referred to separately below.

The election out of the charge was introduced to facilitate commercial transactions allowing the charge to tax to come in over time (as the business was ring fenced with no offset of other deductions against the leasing income).

HMRC consider that the election has been abused and removed it with effect from 23 March 2011.

FA 2011 Sch 6 changes the definition of qualifying plant and machinery (the definition which governs whether a business is within the scope of Chapter 3).

This legislation is only relevant when a lessor company is sold and, therefore, the impact of these changes is going to be limited

The new definition includes plant that has at any time been leased out by the relevant company, or an associate, with carve-outs for excluded background plant, and plant leased to it by an associate.

This replaces the previous test which referred to plant that had qualified for capital allowances and widens the potential ambit of Chapter 3.

HMRC are responding to ‘swamping’ transactions whereby large amounts of plant were bought and leased under long funding leases with up front income to avoid the charge.

There will also be a change to how the value of assets is determined under this legislation, in that the ‘ascribed value’ will replace the ‘market value’.

It is now assumed if a company acquires any plant, then the plant has been acquired for an amount equal to its ascribed value as at the relevant day, as opposed to its market value.

The ascribed value of plant is the higher of the market value of the plant at the relevant time and the present value of the leased asset. Again HMRC are responding to specific structuring.

The anti-avoidance sections designed to prevent manipulation of balance sheet figures will be widened and made more robust.

These provisions permit an adjustment to be made in certain circumstances when balance sheet figures that contribute to the calculation of the charge have been manipulated. There is a new section inserted into the legislation which sets out the various amounts that might be adjusted.

These are:

a. the relevant plant or machinery value;

b. the value of plant or machinery falling within ss 387(7) or 410(6);

c. the relevant company’s or partnership’s income in that period of 12 months ending with the relevant day;

d. the amount of PM;

e. the amount of TWDV;

f. the amount of any disposal value to be substituted by section 398G(3); and

g. any underlying amount required to calculate or verify an amount mentioned in any of the preceding paragraphs.

Previously these amounts were limited to points (d) and (e).

Why the changes?

HMRC are strengthening the legislation in response to continued structuring as increasingly complex arrangements are entered into in an effort to avoid the effects of the legislation.

Many of the changes are a consequence of disclosed arrangements to HMRC under the DOTAS regime.

Why are the changes important?

This legislation is only relevant when a lessor company is sold and, therefore, the impact of these changes is going to be limited.

However, it should be noted that the definitions are quite wide and continue to broaden the legislation, and, therefore, should be considered in relation to any sale of a company with a leasing, renting or hire business.

It should also be noted that the existing legislation in its current form is not straightforward and, with the FA 2011 amendments adding complexity, this is an area that requires careful consideration.

Kevin Paterson, Tax Partner, Ernst & Young