Finance Act 2006 (c. 25)

(The document as of February, 2008)

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(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 "pre-existing term", in relation to a lease, means the term of the lease apart from the extension in question.

70YD Increase in proportion of residual amount guaranteed: review of status

(1) This section applies where--

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

(b) the person enters into an arrangement which meets, or arrangements which (taken together) meet, the conditions in subsection (2).

(2) The conditions are that--

(a) as a result of the arrangement or arrangements, there is an increase, after the inception of the lease, in the proportion of the residual amount that is guaranteed as mentioned in section 70YE(1)(b), and

(b) had the arrangement or arrangements been entered into before the inception of the lease, the lease would have been a long funding lease.

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

(a) the existing lease had terminated immediately before the time of the relevant transaction,

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

(c) the term of the new lease were the portion of the term of the existing lease that remains unexpired as at the date of the relevant transaction;

(d) the date of the relevant transaction were the date of both--

(i) the inception of the new lease, and

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

(4) For the purposes of this section, the "relevant transaction" is the arrangement or, where two or more arrangements have been entered into, the latest of them.

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

Interpretation

70YE "Minimum lease payments"

(1) In the case of any lease, the minimum lease payments are the minimum payments under the lease over the term of the lease (including any initial payment) together with--

(a) in the case of the lessee, so much of any residual amount as is guaranteed by him or a person connected with him, or

(b) in the case of the lessor, so much of any residual amount as is guaranteed by the lessee or a person who is not connected with the lessor.

(2) In determining the minimum payments, exclude so much of any payment as represents--

(a) charges for services, or

(b) qualifying UK or foreign tax to be paid by the lessor.

(3) In this section--

"qualifying UK or foreign tax" means any tax or duty chargeable under the law of any part of the United Kingdom, or under the law of any foreign country, other than--
(a)
income tax,
(b)
corporation tax,
(c)
any tax chargeable under the law of a foreign country which is similar to income tax or corporation tax,

and here "foreign country" means any territory outside the United Kingdom;
"residual amount" means so much of the fair value of the plant or machinery subject to the lease as cannot reasonably be expected to be recovered by the lessor from the payments under the lease.

(4) In the definition of "residual amount" in subsection (3), "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.

70YF The "term" of a lease

(1) The term of a lease is the period comprising--

(a) so much of the post-commencement period as is a non-cancellable period, and

(b) any subsequent periods which meet the conditions in subsection (2).

(2) The conditions are that--

(a) the lessee has an option to continue to lease the asset for the period (whether with or without further payment), and

(b) it is reasonably certain, at the inception of the lease, that the lessee will exercise that option.

(3) The "post-commencement period" is so much of the period of the lease as begins with the commencement of the term of the lease.

(4) A "non-cancellable period" is any period during which the lessee may terminate the lease only--

(a) upon the occurrence of some remote contingency, or

(b) upon payment by the lessee of such an additional amount that, at the inception of the lease, continuation of the lease is reasonably certain.

(5) If, at the commencement of the term of the lease,--

(a) the market value of the asset exceeds £1 million, and

(b) the estimated market value of the asset 5 years after the commencement of the term of the lease is more than half of the market value of the asset at the commencement of the term of the lease,

subsection (6) applies.

(6) If, in any such case, the term of the lease (apart from this subsection) would be 5 years or less, but--

(a) the lessee has one or more options to continue to lease the asset,

(b) on the assumption that it is reasonably certain, at the inception of the lease, that the lessee will exercise those options, the term of the lease would exceed 7 years, and

it is to be assumed for the purposes of this section that any option to continue to lease the asset will be exercised, unless it is reasonably certain, at the inception of the lease, that the option will not be exercised.

(7) Subsection (6) does not apply if, leaving out of account any options that would, by virtue of that subsection, result in the term of the lease exceeding 7 years, Conditions A, B and C in section 70I (meaning of "short lease") are met.

(8) See also section 70YC(5) (extension, for certain purposes, of term of lease that is not a long funding lease).

70YG "Termination amount"

(1) This section applies where plant or machinery is or has been, or is to be, leased under a long funding lease.

(2) Construe "termination amount", in the case of a long funding lease, in accordance with the following provisions of this section.

(3) If--

(a) the lease terminates as a result of a plant or machinery disposal event, or

(b) a plant or machinery disposal event occurs as a result of, or otherwise in connection with, the termination of the lease,

the termination amount is the disposal value that would have fallen to be brought into account by the lessor by reason of the plant or machinery disposal event on the assumptions in subsection (4).

(4) Those assumptions are--

(a) that section 34A (which prevents the lessor's expenditure for long funding leasing from being qualifying expenditure) did not apply in the case of the lessor, and

(b) that the lessor had claimed all the capital allowances that would in consequence have been available to him.

(5) If--

(a) subsection (3) does not apply, and

(b) the lease is a long funding finance lease,

the termination amount is the value at which, immediately after the termination of the lease, the plant or machinery is recognised in the books or other financial records of the lessor.

(6) If--

(a) subsection (3) does not apply, and

(b) the lease is a long funding operating lease,

the termination amount is the market value of the plant or machinery immediately after the termination of the lease.

(7) For the purposes of this section a "plant or machinery disposal event" is an event that would have been a disposal event in relation to the plant or machinery in the case of the lessor on the assumptions in subsection (4).

70YH "Termination value"

(1) This section applies where plant or machinery is or has been, or is to be, leased under a long funding lease.

(2) Construe "termination value" in accordance with the following provisions of this section.

(3) The general rule is that the termination value of any plant or machinery is the value of the plant or machinery at or about the time when the lease terminates.

(4) Any reference to calculation by reference to the termination value includes a reference to calculation by reference to any one or more of--

(a) the proceeds of sale, if the plant or machinery is sold after the lease comes to an end,

(b) any insurance proceeds, compensation or similar sums in respect of the plant or machinery,

(5) Any reference to calculation by reference to the termination value also includes a reference to--

(a) determination in a way which, or by reference to factors or criteria which, might reasonably be expected to produce a broadly similar result to calculation by reference to the termination value, or

(b) any other form of calculation indirectly by reference to the termination value.

70YI General definitions

(1) Construe these expressions as follows--

"absolute owner", in the application of this Chapter in relation to Scotland, means the owner;
"arrangement" includes any transaction or series of transactions;
"background plant or machinery for a building" is to be construed in accordance with sections 70R to 70T;
"building" includes a reference to--
(a)
a structure,
(b)
part of a building or structure;
"commencement", in relation to the term of a lease, means the date on and after which the lessee is entitled to exercise his right to use the complete leased asset under the lease;

for this purpose an asset is to be regarded as complete if its construction is substantially complete;

"derived lease" is to be construed in accordance with section 70L;
"the finance lease test" means the finance lease test in section 70N;
"fixture"--
(a)
means any plant or machinery that is so installed or otherwise fixed in or to a building or other description of land as to become, in law, part of that building or other land, and
(b)
includes any boiler or water-filled radiator installed in a building as part of a space or water heating system;
"funding lease" has the meaning given by section 70J;
"inception", in relation to a plant or machinery lease, means the earliest date on which the following conditions are met--
(a)
there is a contract in writing for the lease between the lessor and the lessee,
(b)
either--
(i)
the contract is unconditional, or
(ii)
if it is conditional, the conditions have been met,
(c)
no terms remain to be agreed;
"initial payment", in the case of a plant or machinery lease, means a payment by the lessee--
(a)
at or before the time when the lease is entered into, and
(b)
in respect of the plant or machinery which is the subject of the lease;
"lease" includes any agreement or arrangement which is or includes a plant or machinery lease (and "lessor", "lessee" and other related expressions are to be construed accordingly);
"lease", in relation to land, includes--
(a)
an underlease, sublease or any tenancy,
(b)
in England and Wales or Northern Ireland, an agreement for a lease, underlease, sublease, or tenancy,
(c)
in Scotland, an agreement (including missives of let not constituting a lease) under which a lease, sublease or tenancy is to be executed,
(d)
in the case of land situated outside the United Kingdom, any interest corresponding to a lease as so defined,

and "lessor", "lessee" and other related expressions are to be construed accordingly;
"lease", in relation to plant or machinery, includes a sublease (and "lessor", "lessee" and other related expressions are to be construed accordingly);
"lessee", in relation to a lease, includes any person entitled to the lessee's interest under the lease;
"lessor", in relation to a lease, includes any person entitled to the lessor's interest under the lease;
"long funding lease" has the meaning given by section 70G;
"long funding finance lease" means a long funding lease that meets the finance lease test by virtue of section 70N(1)(a);
"long funding operating lease" means a long funding lease which is not a long funding finance lease;
"market value", in relation to plant or machinery, is to be construed in accordance with subsection (2);
"minimum lease payments" has the meaning given by section 70YE;
"mixed lease" is to be construed in accordance with section 70L;
"plant or machinery lease" has the meaning given by section 70K (and see also sections 70L and 70M);
"remaining useful economic life", in the case of any leased plant or machinery, is the period--
(a)
beginning with the commencement of the term of the lease, and
(b)
ending when the asset is no longer used, and no longer likely to be used, by any person for any purpose as a fixed asset of a business;
"short lease" is to be construed in accordance with section 70I;
"the term", in relation to a lease, is to be construed in accordance with section 70YF (but see also section 70YC(5) (extension, for certain purposes, of term of lease that is not a long funding lease));
"termination", in relation to a lease,--
(a)
means the coming to an end of the lease, whether by effluxion of time or in any other way, and
(b)
includes in particular the bringing to an end of the lease by any person or by operation of law,

and related expressions are to be construed accordingly;
"termination amount" is to be construed in accordance with section 70YG;
"termination value" is to be construed in accordance with section 70YH.

(2) The market value of any plant or machinery at any time is to be determined on the assumption of a disposal by an absolute owner free from all leases and other encumbrances.

(3) In relation to a lease, any reference to plant or machinery includes a reference to fixtures.

(4) Section 839 of ICTA (connected persons) applies.

(5) Any necessary apportionments under or by virtue of this Chapter are to be made on a just and reasonable basis.

70YJ Power to vary the meaning of certain expressions

(1) The Treasury may by regulations make provision amending this Chapter so as to vary--

(a) the meaning of "plant or machinery lease", or

(b) the finance lease test.

(2) A statutory instrument containing regulations under this section is not to be made unless a draft of the instrument has been laid before, and approved by a resolution of, the House of Commons. " .

Cases in which short-life asset treatment is ruled out

8 (1) The Table in section 84 is amended as follows.

(2) In paragraph 1 after sub-paragraph (a) insert--

(aa)

section 13A (use for other purposes of plant or machinery provided for long funding leasing), or

Fixtures

9 (1) In section 172 (scope of Chapter 14 of Part 2 (fixtures)) after subsection (2) insert--

" (2A) Subsections (1) and (2) are subject to section 172A. " .

(2) After section 172 insert--

" 172A Long funding leases etc: cases where this Chapter does not apply.

(1) This section applies where plant or machinery that is or becomes a fixture is the subject of a long funding lease (see Chapter 6A).

(2) This section also applies if, in any such case,--

(a) the lessee under the long funding lease is or becomes the lessor of some or all of the plant or machinery under a further lease, and

(b) the further lease is not itself a long funding lease within subsection (1).

(3) This Chapter does not apply to determine the entitlement of the lessor or the lessee (under either lease) to allowances under this Part in respect of expenditure on the plant or machinery.

(4) This Chapter does not apply to determine whether the lessor or the lessee (under either lease) is to be treated as the owner of the plant or machinery. " .

Part 2 Corporation tax

Introductory

10 ICTA is amended as follows.

Special rules for long funding leases

11 In Part 12 (special classes of companies and businesses) after section 502 insert the following Chapter--

" Chapter 5A Special rules for long funding leases of plant or machinery: corporation tax

Introductory

502A Scope of Chapter 5A

This Chapter has effect for the purposes of corporation tax only.

Lessors under long funding finance leases

502B Lessor under long funding finance lease: rental earnings

(1) This section applies for determining for the purposes of corporation tax the profits of a company for any period of account in which it is the lessor of any plant or machinery under a long funding finance lease.

(2) The amount to be brought into account as the lessor's taxable income from the lease for the period of account is the amount of the rental earnings in respect of the lease for the period of account.

(3) The "rental earnings" for any period is the amount which, in accordance with generally accepted accounting practice, falls (or would fall) to be treated as the gross return on investment for that period in respect of the lease where it meets the finance lease test.

(4) If the lease is one which, under generally accepted accounting practice, falls (or would fall) to be treated as a loan in the accounts in question, so much of the rentals under the lease as fall (or would fall) to be treated as interest are to be treated for the purposes of this section as rental earnings.

502C Lessor under long funding finance lease: exceptional items

(1) This section applies for determining for the purposes of corporation tax the profits of a company which is or has been the lessor under a long funding finance lease.

(2) This section has effect where a profit or loss (whether of an income or capital nature)--

(a) arises to the company in connection with the lease, and

(b) in accordance with generally accepted accounting practice falls to be recognised for accounting purposes in a period of account, but

(c) would not, apart from this section, be brought into account in computing the profits of the company for the purposes of corporation tax.

(3) The profit or loss is to be treated--

(a) in the case of a profit, as income of the company attributable to the lease,

(b) in the case of a loss, as a revenue expense incurred by the company in connection with the lease.

(4) Any reference in this section to an amount falling to be recognised for accounting purposes in a period of account is a reference to an amount falling to be recognised for accounting purposes--

(a) in the company's profit and loss account or income statement,

(b) in the company's statement of recognised gains and losses or statement of changes in equity, or

502D Lessor under long funding finance lease making termination payment

(1) This section applies for determining the liability to corporation tax of a company which is or has been the lessor under a long funding finance lease.

(2) Where--

(a) the lease terminates, and

(b) a sum calculated by reference to the termination value is paid to the lessee,

no deduction in respect of the sum paid to the lessee is allowed in computing the profits of the company.

(3) This section does not prevent a deduction in respect of a sum to the extent that the sum is brought into account in determining the company's rental earnings.

Lessors under long funding operating leases

502E Lessor under long funding operating lease: periodic deduction

(1) This section applies for determining for the purposes of corporation tax the profits of a company for any period of account--

(a) for the whole of which, or

(b) for any part of which,

the company is the lessor of any plant or machinery under a long funding operating lease.

(2) A deduction is allowed in computing the profits of the company for the period of account.

(3) The amount of the deduction for any period of account is to be determined as follows.

(4) First, find the "relevant value" for the purposes of subsection (6)(a) below, which is--

(a) if the only use of the plant or machinery by the lessor has been the leasing of it under the long funding operating lease as a qualifying activity, cost;

(b) if the last previous use of the plant or machinery by the lessor was the leasing of it under another long funding operating lease as a qualifying activity, market value;

(c) if the last previous use of the plant or machinery by the lessor was the leasing of it under a long funding finance lease as a qualifying activity, the recognised value;

(d) if the last previous use of the plant or machinery by the lessor was for the purposes of a qualifying activity other than leasing under a long funding lease, the lower of cost and market value;

(e) if the lessor owns the plant or machinery as a result of having incurred expenditure on its provision for purposes other than those of a qualifying activity, but--

(i) the plant or machinery is brought into use by the lessor for the purposes of a qualifying activity on or after 1st April 2006, and

(ii) that qualifying activity is the leasing of the plant or machinery under the long funding operating lease,

the relevant value is the lower of first use market value and first use amortised value.

(5) In subsection (4) above--

"cost" means the amount of the expenditure incurred by the lessor on the provision of the plant or machinery;
"first use amortised value" means the value that the plant or machinery would have at the time when it is first brought into use for the purposes of the qualifying activity, on the assumption that--
(a)
the cost of acquiring the plant or machinery had been written off on a straight line basis over the remaining useful economic life of the plant or machinery, and
(b)
any further capital expenditure incurred had been written off on a straight line basis over so much of the remaining economic life of the plant or machinery as remains at the time when the expenditure is incurred;
"first use market value" means the market value of the plant or machinery at the time when it is first brought into use for the purposes of the qualifying activity;
"market value" means the market value of the plant or machinery at the commencement of the term of the long funding operating lease;
"recognised value" means the value at which the plant or machinery is recognised in the books or other financial records of the lessor at the commencement of the long funding operating lease.

(6) From--

(a) the relevant value determined in accordance with subsection (4) above,

subtract

(b) the amount which, at the commencement of the term of the lease, is (or, in a case falling within subsection (4)(e) above, would have been) expected to be the residual value of the plant or machinery,

to find the expected gross reduction in value over the term of the lease.

(7) Apportion the amount of that expected gross reduction in value to each period of account in which any part of the term of the lease falls.

(8) The apportionment must be on a time basis according to the proportion of the term of the lease that falls in each period of account.

(9) The amount of the deduction for any period of account is the amount so apportioned to that period.

502F Long funding operating lease: lessor's additional expenditure

(1) This section applies if in any period of account--

(a) a company is the lessor of any plant or machinery under a long funding operating lease,

(b) the company incurs capital expenditure in relation to the plant or machinery, and

(c) that capital expenditure (the "additional expenditure") is not reflected in the market value of the plant or machinery at the commencement of the term of the lease.

(2) In a case falling within section 502E(4)(e) above, subsection (1)(c) above has effect as if the reference to the commencement of the term of the lease were a reference to the time when the plant or machinery is first brought into use by the lessor for the purposes of the qualifying activity.

(3) Where this section applies, an additional deduction is allowed in computing the profits of the company for each post-expenditure period of account in which the company is the lessor of the plant or machinery under the lease.

(4) The amount of the deduction for any such period of account is to be determined as follows.

(5) Find ARV, CRV, PRV, and TRV where--

"ARV" is the amount which, at the time when the additional expenditure is incurred, is expected to be the residual value of the plant or machinery;
"CRV" is the amount which, at the commencement of the term of the lease, is expected to be the residual value of the plant or machinery;
"PRV" is the sum of any amounts that fell to be taken into account as RRV (see subsection (6)) in the application of this section in relation to any previous additional expenditure incurred by the company in relation to the leased plant or machinery;
"TRV" is the total of CRV and PRV.

(6) Find RRV, where--

(a) if ARV exceeds TRV, RRV is the portion of the excess that is a result of the additional expenditure, but

(b) if ARV does not exceed TRV, RRV is nil.

(7) From--

(a) the amount of the additional expenditure,

subtract

(b) RRV,

to find the expected partial reduction in value over the remainder of the term of the lease.

(8) Apportion the amount of that expected partial reduction in value to each post-expenditure period of account in which any part of the term of the lease falls.

(9) The apportionment must be on a time basis according to the proportion of the term of the lease that falls in each post-expenditure period of account.

(10) The amount of the additional deduction for any period of account is the amount so apportioned to that period.

(11) In this section "post-expenditure period of account" means any period of account ending after the incurring of the additional expenditure.

502G Lessor under long funding operating lease: termination of lease

(1) This section applies for determining the liability to corporation tax of a company which is the lessor immediately before the termination of a long funding operating lease.

(2) Step 1 is to find--

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