EXPLANATORY NOTE

 

1. This clause provides for capital allowances to be given to the lessor on the lower of the cost prices to the lessor and to the lessee where new machinery or plant is sold and leased back provided certain conditions are met, with effect from Royal Assent. This removes the further restriction to the current market value or notional written down value that apply at present.

 

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DETAILS OF THE CLAUSE

 

2. Subsection (1) adds a new section 76B to the Capital Allowances Act 1990 ("CAA"). This introduces a new election which allows capital allowances to be claimed by the lessor on the lower of the sale price to the lessor and the original cost price to the lessee where new machinery or plant is sold and leased back provided certain conditions are met. This is relevant where the amount on which capital allowances could be claimed would otherwise be limited by section 76(2) CAA to the current open market value or by section 76A(5) CAA to the notional written down value of the machinery or plant.

3. Section 76B(1)(a) provides that section 76B may apply to a sale and leaseback of machinery or plant except where the sale is between connected persons or it appears that the sole or main benefit of the sale, or transactions including the sale, is the obtaining of machinery and plant capital allowances.

4. Section 76B(1)(b) requires the conditions in subsection (2) to be fulfilled.

5. Section 76B(1)(c) provides for the section to have effect on a joint election by the seller and buyer.

6. Section 76B(2) sets out the conditions that must be fulfilled before a valid election can be made. The conditions are as follows.

1. The seller has incurred capital expenditure on the provision of the machinery or plant. This rules out machinery or plant acquired by the seller as trading stock or as a gift.

2. The machinery or plant was new when, or after, it was acquired by the seller. The reference to new after it was acquired by the seller is needed to cover purchase by the seller under a hire purchase contract entered into before it exists, as section 60 CAA treats it as belonging to the seller from the date the contract is entered into. New is defined in section 83(1) CAA to mean unused and not second-hand. In this context, machinery or plant is not regarded as having been brought into use by reason only of being held as trading stock, being in the process of construction by the taxpayer, or of operation for commissioning, testing or training before it is actually brought into use for the purpose for which it is acquired.

3. Section 75 CAA (as extended by section 76 and 76A) does not apply to the acquisition by the seller. This excludes any case where the machinery or plant was acquired from a connected person, continues to be used by the previous owner or a person connected to the previous owner, or it appears that the sole or main benefit of the sale by the previous owner or transactions including that sale was the obtaining of machinery and plant capital allowances.

4. The sale takes place not more than 4 months after the machinery or plant is brought into use by any person for any purpose. In this context, machinery or plant is not regarded as having been brought into use by reason only of being held as trading stock, being in the process of construction by the taxpayer, or of operation for commissioning, testing or training before it is actually brought into use for the purpose for which it is acquired.

5. The seller has neither claimed capital allowances on expenditure on the machinery or plant, nor added it to a capital allowances pool.

1. Section 76B(3) sets out the consequences that follow where a valid election is made under section 76B(1). These are as follows.

1. The seller may not claim capital allowances on expenditure on the machinery or plant.

2. The seller may not add expenditure on the machinery or plant to a machinery and plant pool.

3. Section 76(2) CAA, which applies to the sale as capital allowances have not been claimed by the seller, would normally restrict the amount on which capital allowances may be claimed by the lessor to the smallest of the sale price to the lessor, the cost price to the seller or any person connected to the seller and the current open market value. The open market value limit is removed, which allows capital allowances to be claimed by the lessor on the smaller of the sale price to the lessor and the original cost price to the seller or any person connected to the seller.

4. Where the leaseback is a finance lease, the amount on which the lessor may claim capital allowances is further restricted by section 76A(5) CAA to the notional written down value of the machinery or plant. This further limit is also removed.

1. Section 76B(4) requires the election to be made by a notice in writing given to the Inland Revenue not more than two years after the date of the sale. The time limit relates to the date of sale, rather than to the end of an accounting period, as the election is made jointly by the lessor and the lessee who may have different accounting dates.

2. Section 76B(5) provides that the election is irrevocable and, as with other elections for capital allowances, is not subject to the special rules on claims and elections for income tax and corporation tax self-assessment.

3. Section 76B(6) adapts the wording to cover sale and leaseback where the sale is on hire purchase.

4. Section 76B(7) adapts the wording to cover sale and leaseback of machinery or plant which is on hire purchase by the seller.

5. Section 76(8) defines "return".

 

6. Subsection (2) makes a minor consequential amendment.

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BACKGROUND

7. Where machinery or plant is sold and leased back, the amount on which the lessor may claim capital allowances is limited to the disposal value, if any, brought into account by the lessee. This rule, which was introduced in 1971, applies where the seller has claimed capital allowances. It has the effect that capital allowances can be claimed by the lessor on the lower of the original cost to the seller and the sale price to the lessor. This rule is not changed by this clause.

8. Under a rule introduced in 1972, where machinery or plant is sold and leased back and capital allowances have not been claimed by the seller, capital allowances can be claimed by the lessor on the smallest of the original cost to the seller, the sale price to the lessor, and the current open market value at the date of sale. This rule is modified by this clause for sale and leaseback of new machinery and plant.

9. Under a rule introduced in 1997, where machinery or plant is sold and leased back under a finance lease, the amount on which capital allowances may be claimed by the lessor is further restricted to the notional written down value of the machinery or plant. The notional written down value is calculated by writing down the original cost to the seller by the full amount of capital allowances which the seller could have claimed each year up to the sale if the seller had been entitled to capital allowances. This rule is modified by this clause for sale and leaseback of new machinery and plant.

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