Finance Act 2006 (c. 25)

(The document as of February, 2008)

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(a) of that person, or

(b) where that person is the lessor, of any person connected with him.

(2) In this section "accounts", in relation to a company, includes any accounts which--

(a) relate to two or more companies of which that company is one, and

(b) are drawn up in accordance with generally accepted accounting practice.

(3) Where for any period--

(a) a person is not within the charge to income tax or corporation tax by reason of not being resident in the United Kingdom, and

(b) accounts are not prepared in accordance with international accounting standards or UK generally accepted accounting practice,

any question relating to generally accepted accounting practice is to be determined for the purposes of this section by reference to generally accepted accounting practice with respect to accounts prepared in accordance with international accounting standards.

70O The lease payments test

(1) A lease meets the lease payments test if--

(a) the present value of the minimum lease payments (see section 70YE),

is equal to

(b) 80% or more of the fair value of the leased plant or machinery.

(2) The present value of the minimum lease payments is to be calculated by using the interest rate implicit in the lease.

(3) In this section "fair value" means--

(a) the market value of the leased plant or machinery,

less

(b) any grants receivable towards the purchase or use of that plant or machinery.

(4) For the purposes of this section--

(a) the interest rate implicit in the lease is the interest rate that would apply in accordance with normal commercial criteria, including, in particular, generally accepted accounting practice (where applicable), but

(b) if the interest rate implicit in the lease cannot be determined in accordance with paragraph (a), it is the temporal discount rate for the purposes of section 70 of the Finance Act 2005 (companies: film relief: valuation of "rights to guaranteed income" and "disposed rights").

70P The useful economic life test

A lease meets the useful economic life test if the term of the lease is more than 65% of the remaining useful economic life of the leased plant or machinery.

Leases excluded by right of lessor etc to claim capital allowances

70Q Leases excluded by right of lessor etc to claim capital allowances

(1) A lease is not a long funding lease in the case of the lessee if it is excluded by virtue of subsection (2) (but see also subsection (5)).

(2) A lease is excluded if the lessor, or any superior lessor (see subsections (7) to (9)),--

(a) is entitled, at the commencement of the term of the lease, to claim a relevant allowance (see subsection (6)),

(b) would have been so entitled at that time, but for section 70V (tax avoidance involving international leasing),

(c) has at any earlier time been entitled to claim such an allowance, but has not been required to bring a disposal value into account in accordance with section 61(1)(ee), or

(d) would fall within any one or more of paragraphs (a) to (c), if he had been within the charge to income tax or corporation tax at the inception of the lease and any earlier times.

(3) Where for any period the lessor, or any superior lessor, is a person--

(a) who is not within the charge to income tax or corporation tax by reason of not being resident in the United Kingdom, and

(b) who does not prepare accounts in accordance with international accounting standards or UK generally accepted accounting practice,

subsection (4) applies.

(4) In determining whether the condition in subsection (2)(d) is met in any such case, any question relating to generally accepted accounting practice in relation to that person and that period is to be determined by reference to generally accepted accounting practice with respect to accounts prepared in accordance with international accounting standards.

(5) A lease is not excluded by virtue of subsection (2) if--

(a) the inception of the lease is before 28th June 2006, and

(b) by virtue only of section 70J(6), the lease is not a funding lease in the case of the lessor.

(6) A "relevant allowance" is an allowance under this Act in respect of the leased plant or machinery.

(7) There is a "superior lessor" only if the leased plant or machinery is the subject of a chain of superior leases.

(8) Leased plant or machinery is the subject of a chain of superior leases if--

(a) the lessor has his interest in relation to the plant or machinery under or by virtue of a lease from a third person (P), or

(b) the circumstances are as in paragraph (a), but P has his interest in relation to the plant or machinery under or by virtue of a lease from a fourth person (Q), or

(c) the circumstances are as in paragraph (b), but Q has his interest in relation to the plant or machinery under or by virtue of a lease from a fifth person (R),

and so on, where there is more than a fifth person involved.

(9) Where any leased plant or machinery is the subject of a chain of superior leases, the superior lessors are the persons described in subsection (8) as P, Q, R, and so on.

(10) Subsections (6) to (9) have effect for the interpretation of this section.

Excluded leases of background plant or machinery for a building

70R Excluded leases of background plant or machinery for a building

(1) Construe references to an excluded lease of background plant or machinery for a building in accordance with this section.

(2) This section applies where--

(a) plant or machinery is affixed to, or otherwise installed in or on, any land which consists of or includes a building,

(b) the plant or machinery is background plant or machinery for the building (see subsections (4) and (5)),

(d) none of the disqualifications set out in section 70S applies.

(3) In any such case, the derived lease of the plant or machinery is an excluded lease of background plant or machinery for a building.

(4) The background plant or machinery for a building is any plant or machinery--

(a) which is of such a description that plant or machinery of that description might reasonably be expected to be installed in, or in or on the sites of, a variety of buildings of different descriptions, and

(b) whose sole or main purpose is to contribute to the functionality of the building or its site as an environment within which activities can be carried on.

(5) Subsection (4) has effect subject to the provisions of any order under section 70T.

70S The disqualifications

(1) This section sets out the disqualifications mentioned in subsection (2)(d) of section 70R and is to be construed as one with that section.

(2) Disqualification A is that the amounts payable--

(a) under the mixed lease, or

(b) under any other arrangement,

vary, or may be varied, by reference to the value from time to time to the lessor of allowances under this Act in respect of expenditure incurred by him in the provision of the background plant or machinery for the building.

(3) Disqualification B is that the main purpose, or one of the main purposes, of entering into--

(a) the mixed lease,

(b) a series of transactions of which the mixed lease is one, or

is to secure that allowances under this Act are available to the lessor in respect of expenditure incurred in the provision of background plant or machinery for a building.

70T Orders relating to background plant or machinery for a building

(1) This section supplements section 70R and is to be construed as one with it.

(2) The Treasury may by order prescribe--

(a) descriptions of plant or machinery to be used as examples of the kinds of plant or machinery that may be regarded as falling within the definition of background plant or machinery for a building in determining whether any particular plant or machinery does or does not fall within that definition;

(b) descriptions of plant or machinery to be deemed to be background plant or machinery for a building;

(3) An order under this section--

(a) may make different provision for different cases (including different descriptions of building),

(b) may contain incidental, consequential, supplemental, or transitional provision or savings.

(4) The first order made under this section may include provisions having effect in relation to times before the making of the order (but not times earlier than 1st April 2006).

Exclusion for certain plant or machinery leased with land

70U Plant or machinery leased with land: low percentage value

(1) This section applies where--

(a) any plant or machinery (the "relevant plant or machinery") is affixed to, or otherwise installed, in or on any land,

(b) the plant or machinery is not background plant or machinery for any building situated in or on the land,

(d) none of the relevant disqualifications applies.

(2) For the purposes of this section the "relevant disqualifications" are the disqualifications set out in section 70S, but for this purpose--

(a) take the reference in subsection (1) of that section to subsection (2)(d) of section 70R as a reference to this subsection (and, accordingly, construe the second reference to that section as a reference to this section), and

(b) take references in section 70S to background plant or machinery for a building as references to relevant plant or machinery.

(3) Where this section applies, the derived lease of the relevant plant or machinery is excluded by this section if the condition in subsection (4) is met at the commencement of the term of that lease.

(4) The condition is that AMV does not exceed both--

(a) 10% of BMV; and

(b) 5% of LMV.

(5) For that purpose--

AMV is the aggregate of--
(a)
the market value of the relevant plant or machinery, and
(b)
the market value of any other plant or machinery that falls within subsection (1) in the case of the leased land;
BMV is the aggregate market value of all the background plant or machinery leased with the land;
LMV is the market value of the land (including buildings and fixtures).

(6) For this purpose the market value of any land at any time is to be determined on the assumption of a sale by an absolute owner of the land free from all leases and other encumbrances.

Avoidance

70V Tax avoidance involving international leasing

(1) This section applies where matters are so arranged that there are plant or machinery leases such that--

(a) under a lease by a non-resident, an asset is provided directly or indirectly to a resident,

(b) the direct provision of the asset to the resident is by a lease which, in the case of the resident, is a long funding lease or a lease to which section 67 (hire purchase etc) applies,

(c) the asset is used by the resident for the purpose of leasing it under a lease (the "relevant lease") that would not (apart from this section) be a long funding lease in the case of the resident, and

(d) under the relevant lease, the asset is provided directly or indirectly (but by a lease) to a non-resident.

(2) Subsection (3) applies if the sole or main purpose of arranging matters in that way is to obtain a tax advantage by securing that allowances under this Part are available to a resident by virtue of--

(a) section 67 (hire purchase), or

(b) section 70A (long funding leases).

(3) In any such case, the relevant lease is deemed to be a long funding lease in the case of the resident who is the lessor under it.

(4) The reference in this section to a person obtaining a tax advantage (see section 577(4)) also includes a reference to a person obtaining a tax advantage within the meaning of Chapter 1 of Part 17 of ICTA (see section 709 of that Act).

(5) In this section--

"non-resident" means a person who--
(a)
is not resident in the United Kingdom, and
(b)
does not use the plant or machinery exclusively for earning profits chargeable to tax;
"resident" means a person who--
(a)
is resident in the United Kingdom, or
(b)
uses the plant or machinery exclusively for earning profits chargeable to tax.

Transfers, assignments, novations, leaseback, variations etc

70W Transfers, assignments etc by lessor

(1) This section applies in any case where the following conditions are met--

(a) a person (the "old lessor") is lessor of plant or machinery under a plant or machinery lease (the "old lease"),

(b) during the term of the lease, the old lessor transfers the plant or machinery to another person (the "new lessor"),

(d) immediately after the transfer, the new lessor is the lessor of the plant or machinery under a lease ("the new lease") (whether or not the same lease as the old lease).

(2) If it is not otherwise the case,--

(a) the old lessor is to be treated as if the old lease terminated immediately before the transfer, and

(b) the new lessor is to be treated as if the new lease had been entered into immediately after the transfer.

(3) The new lessor is also to be treated as if the date of the transfer were the date of both--

(a) the inception of the new lease, and

(b) the commencement of the term of the new lease,

if it is not otherwise the case.

(4) If, immediately before the transfer, the old lease was (or was treated by virtue of this subsection as being) in the case of the old lessor a lease of either of the following descriptions--

(a) a long funding lease, or

(b) a lease which is not a long funding lease,

the new lease is to be treated in the case of the new lessor as being a lease of the same description, if the conditions in subsection (5) are met.

(5) The conditions are that--

(a) the term of the new lease is the unexpired portion of the term of the old lease, and

(b) the amounts receivable under the new lease are the same as would have been receivable under the old lease, assuming it to have continued in effect.

(6) If--

(a) it is not otherwise the case, and

(b) the conditions in subsection (5) are met,

the lessee is to be treated as if the old lease and the new lease were the same continuing lease.

(7) Any reference in this section to a transfer of plant or machinery by a person includes a reference to--

(a) any kind of disposal of, or of the person's interest in, the plant or machinery,

(b) any arrangements under which the person's interest in the plant or machinery is terminated and another person becomes lessor of the plant or machinery,

(c) in a case where the plant or machinery is a fixture and the person is treated under section 176 as the owner, any cessation of ownership under section 188, 190, 191, 192 or 192A.

70X Transfers, assignments etc by lessee

(1) This section applies in any case where the following conditions are met--

(a) a person (the "old lessee") is lessee of plant or machinery under a plant or machinery lease (the "old lease"),

(b) during the term of the lease, the old lessee transfers the plant or machinery to another person (the "new lessee"),

(d) immediately after the transfer, the new lessee is the lessee of the plant or machinery under a lease ("the new lease") (whether or not the same lease as the old lease).

(2) If it is not otherwise the case,--

(a) the old lessee is to be treated as if the old lease terminated immediately before the transfer, and

(b) the new lessee is to be treated as if the new lease had been entered into immediately after the transfer.

(3) The new lessee is also to be treated as if the date of the transfer were the date of both--

(a) the inception of the new lease, and

(b) the commencement of the term of the new lease,

if it is not otherwise the case.

(4) If, immediately before the transfer, the old lease was (or was treated by virtue of this subsection as being) in the case of the old lessee a lease of one of the following descriptions--

(a) a long funding lease, or

(b) a lease which is not a long funding lease,

the new lease is to be treated in the case of the new lessee as being a lease of the same description, if the conditions in subsection (5) are met.

(5) The conditions are that--

(a) the term of the new lease is the unexpired portion of the term of the old lease, and

(b) the amounts payable under the new lease are the same as would have been payable under the old lease, assuming it to have continued in effect.

(6) If--

(a) it is not otherwise the case, and

(b) the conditions in subsection (5) are met,

the lessor is to be treated as if the old lease and the new lease were the same continuing lease.

(7) Any reference in this section to a transfer of plant or machinery by a person includes a reference to--

(a) any kind of disposal of, or of the person's interest in, the plant or machinery,

(b) any arrangements under which the person's interest in the plant or machinery is terminated and another person becomes lessee of the plant or machinery,

(c) in a case where the plant or machinery is a fixture and the person is treated under section 176 as the owner, any cessation of ownership under section 188, 190, 191, 192 or 192A.

70Y Sale and leaseback, lease and leaseback etc: lessors

(1) Where--

(a) a person (B) transfers plant or machinery to another person (A),

(b) the plant or machinery is directly or indirectly leased back to B, and

(c) immediately before the commencement of the term of the lease back to B, B is the lessor of the plant or machinery to another person under a lease which is, in B's case, a long funding lease,

the lease back to B is, in the case of both A and B, a long funding lease.

(2) If, in any such case, the plant or machinery is leased back from A to B indirectly, any leases by means of which the indirect lease back from A to B is effected are also long funding leases in the case of each of the parties to them.

(3) Any reference in this section to a transfer of plant or machinery by a person includes a reference to--

(a) any kind of disposal of, or of the person's interest in, the plant or machinery (including the grant of a lease),

(b) any arrangements under which the person's interest in the plant or machinery is terminated and another person becomes entitled to, or to an interest in, the plant or machinery,

(c) in a case where the plant or machinery is a fixture and the person is treated under section 176 as the owner, any cessation of ownership under section 188, 190, 191, 192 or 192A.

70YA Change in accountancy classification of long funding lease

(1) This section applies in any case where--

(a) a person is lessor or lessee under a long funding lease, and

(b) at any time after the inception of the lease, the accountancy classification of the lease as a finance lease or an operating lease changes in the relevant accounts.

(2) The person is to be treated as if--

(a) the lease had terminated immediately before the time of the change,

(b) another lease (the "new lease") had been entered into immediately after the time of the change, and

(3) The person is also to be treated as if the date on which the change occurs were the date of both--

(a) the inception of the new lease, and

(b) the commencement of the term of the new lease.

(4) The cases where the accountancy classification of a long funding lease as a finance lease or an operating lease changes at any time (the "relevant time") in the relevant accounts are those set out in subsections (5) and (6).

(5) Case 1 is where--

(a) immediately before the relevant time, the lease is one that falls (or would fall) to be treated in the relevant accounts in accordance with generally accepted accounting practice as a finance lease for accounting purposes, and

(b) at the relevant time the lease becomes one that falls (or would fall) to be treated in the relevant accounts in accordance with generally accepted accounting practice as not being a finance lease for accounting purposes.

(6) Case 2 is where--

(b) at the relevant time the lease becomes one that falls (or would fall) to be treated in the relevant accounts in accordance with generally accepted accounting practice as a finance lease for accounting purposes.

(7) The Treasury may by regulations make provision for or in connection with restricting the application or operation of this section.

(8) In this section, any reference to a finance lease includes a reference to a loan.

(9) In the application of this section in relation to any person, the "relevant accounts" are the accounts--

(a) of that person, or

(b) where that person is the lessor, of any person connected with that person,

but only to the extent that the treatment of the lease in those accounts as a finance lease or otherwise falls (or would fall) to be determined by reference to that person as the lessor or lessee under the lease.

(10) Subsections (2) and (3) of section 70N (finance lease test: group accounts, and generally accepted accounting practice for persons outside the charge to tax) also apply for the purposes of this section.

70YB Long funding operating lease: extension of term of lease

(1) This section applies in any case where--

(a) a person is lessor or lessee under a long funding operating lease (the "existing lease"),

(b) an event occurs which has the effect of extending the term of the lease (whether by variation of the provisions of the lease, the grant or exercise of an option or in any other way), and

(c) the event is not one by reason of which, within the meaning of section 70YA, the accountancy classification of the lease as an operating lease changes in the relevant accounts.

(2) For this purpose an event has the effect of extending the term of the lease if it meets any of the following conditions--

(a) it has the effect of making a further period a non-cancellable period;

(b) it is the grant of an option to the lessee to continue to lease the plant or machinery for a further period, where it is reasonably certain at the time the option is granted that the lessee will exercise it;

(d) it does not fall within the preceding paragraphs, but it has the effect that the lessee will continue, or is reasonably certain to continue, to lease the plant or machinery for a further period.

For this purpose "further period" means a period falling wholly or partly after the end of the pre-existing term.

(3) The person is to be treated as if--

(a) the existing lease terminated at the end of the day before the effective date,

(b) another lease (the "new lease") were entered into on the effective date, and

(4) The person is also to be treated as if the effective date were the date of both--

(a) the inception of the new lease, and

(b) the commencement of the term of the new lease.

(5) The new lease is to be taken to be a long funding operating lease.

(6) For the purposes of this section the "effective date" is the earlier of--

(a) the day after the end of the pre-existing term of the existing lease;

(b) if the rentals payable are varied as a result of or otherwise in connection with the event, the date on which the variation takes effect.

(7) In this section--

"non-cancellable period" has the same meaning as in section 70YF (the "term" of a lease);
"pre-existing term", in relation to a lease, means the term of the lease apart from the extension in question.

70YC Extension of term of lease that is not a long funding lease

(1) This section applies where--

(a) a person is lessor under a plant or machinery lease (the "existing lease") that is not a long funding lease, and

(b) an event occurs which has the effect of extending the term of the lease (whether by variation of the provisions of the lease, the grant or exercise of an option or in any other way).

(2) Subsection (2) of section 70YB (events having the effect of extending the term of a lease) also has effect for the purposes of this section.

(3) Make the following assumptions--

(a) the existing lease terminates immediately before the effective date,

(b) another lease (the "new lease") is entered into on the effective date,

(c) the term of the new lease is the portion of the term of the existing lease, as extended, that remains unexpired as at the effective date;

(d) the effective date is the date of both--

(i) the inception of the new lease, and

(ii) the commencement of the term of the new lease.

(4) If, on those assumptions, the new lease would be a long funding lease, the person is to be treated on those assumptions.

(5) If subsection (4) does not apply, then, for the purposes of any subsequent application of this section or section 70YD in the case of the existing lease, the term of the existing lease is to be taken to be the term as extended (or further extended).

(6) For the purposes of this section the "effective date" is the earlier of--

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