Sale of lessor companies: intermediate lessors

This measure counteracts an avoidance scheme that uses a sale and leaseback arrangement to transform a lessor into an intermediate lessor with no legal title to the asset.

Baker Tilly analysis

Under the arrangements being countered a lessor has no legal title to the asset and the legislation therefore failed to calculate an appropriate charge. Changes will correct this anomaly by treating plant or machinery that is not owned by the company in a manner consistent with the treatment of plant it owns. This change follows disclosures made under the DOTAS regime and reflects determination of HMRC to challenge tax avoidance.

In detail

The amended legislation will have effect where a lessor company is sold on or after 13 November 2008.

Previously, there was a charge and matching relief when a lessor company changed ownership. The charge is calculated by reference to the difference between the balance sheet value of the plant or machinery assets owned by the company and their tax written down value. The relief, which equals the charge, returns this benefit to the buying group.

Where the lessor sells its plant or machinery and leases it back, it becomes an intermediate lessor. It will not own the asset but if the leaseback is a long funding lease or a hire purchase arrangement it may be entitled to claim capital allowances. The charge is calculated only by reference to owned assets without taking leased assets into consideration. This measure ensures that the charge is calculated by reference to all plant or machinery assets where the lessor has entitlement to capital allowances, not just by reference to plant or machinery owned by the lessor.