HMRC have published new guidance in the Capital Allowances manual covering the new 40 percent first year allowance (FYA). We examine here some points of interest arising from the new guidance.
Change of use after first chargeable period
In the period in which the expenditure on the asset is incurred, and an FYA is claimed, the conditions requiring the lessee (and any sub-lessee) to be within the charge to UK tax will need to be satisfied and, if HMRC require evidence, there will need to be appropriate processes and record-keeping in place. We discuss the expected records in more detail below.
HMRC confirm (CA23195F) that there is no provision addressing change of use or change of lessee/sub-lessee in subsequent periods. In particular:
- There is no provision for a disposal event on such a subsequent change (as there was in the old overseas leasing rules – see s111 CAA 2001); and
- There is no requirement to go back during a review period and revise FYA claims made in prior periods (such a rule had been mooted when lessors were potentially to be awarded full expensing).
Absent any such rules for a disposal event or look-back period, an assessment of the use of the asset needs to be made based on the facts and evidence in the accounting period in which the expenditure is incurred.
At the extreme, the s46V CAA 2001 Targeted Anti-Avoidance Rule (TAAR) could potentially catch a situation where a taxpayer contrived to satisfy the rules initially, prior to entering into non-qualifying lease arrangements. However, this TAAR should not apply if there is simply a change in commercial circumstances which is not contrived.
Month end/quarter end companies
In the past, some leasing businesses used companies with different accounting dates to maximise the timing advantages arising from a finance lease. S220 CAA 2001 (based on rules introduced originally in 1997) countered that by requiring WDA to be time apportioned in certain such cases. Also, the long funding lease rules removed the timing benefits in the case of the longer finance leases which would have given rise to larger such benefits, and these rules continue to apply to all longer finance leases. HMRC have confirmed (CA23195F) that S220 has no application to a FYA provided that the TAAR at s46V is not triggered.
Meaning of ‘insignificant’ in the context of overseas leasing
HMRC indicate that a 5 percent threshold for ‘significant’ will usually be accepted. HMRC give as an example that a company leases an asset to a UK lessee for 50 weeks of the year but to a French company for earning profits subject to French tax for two weeks. This, they say, would count as insignificant overseas leasing (we note 2/52 is under 5 percent). HMRC say that it will “depend entirely on the specific facts”.
Location of asset is not critical
HMRC explain that the physical location of the asset outside the UK does not necessarily mean that the FYA is not available. For example:
- A UK airline lessee (taxable in the UK and presumably exempt from tax outside the UK as a result of Article 8 of relevant treaties applying to its international flights) will enable the lessor to qualify for FYA regardless of where the aircraft operate; and
- A lease of a van to a UK tax resident individual for the purposes of a journey from the UK to France for personal reasons would qualify because the UK person is not using the van to earn income subject to French tax.
Mixed use example
Example four in the guidance involves a piece of plant which is to be used on a project roughly 50 percent by a UK company and 50 percent by a French business. In this case no FYA is available as the ‘wholly (or nearly wholly)’ test is not met. This is as one would expect.
Sub-leasing - burden of proof issues
HMRC say if the lease (presumably to a UK company) prohibits sub-leasing it is reasonable for the lessor to rely on that unless anything makes HMRC suspect otherwise.
If the lease permits sub-leasing with prior consent, HMRC say the lessor should retain copies of such consents granted and if there are none it should be acceptable unless HMRC suspect otherwise. HMRC then go on to say that leasing companies should check that such conditions are being complied with. This appears to involve a process of lessors checking what is being done with assets they have leased which appears potentially onerous.
HMRC say that in the absence of contractual prohibitions on overseas leasing, FYA would not be permitted unless the lessor had maintained details of all lessees and sub-lessees to demonstrate that the tests were met.
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