Over the last few years, tax-based leasing
in the UK has become increasingly difficult as a result of
anti-avoidance provisions that have been introduced.
In response to each of these
changes, the UK leasing industry has adapted and become more
versatile. The industry is now facing yet another challenge – how
to cope with the credit crunch.
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Tax-based leasing is dependent upon leasing
companies (which are usually subsidiaries of banks) obtaining and
utilising the available tax breaks – capital allowances. The value
of these tax breaks has been reduced over the last few years
because of:
• The introduction of the long funding leasing
rules;
• The reduction in the main rate of capital
allowances and the corporation tax rate;
• The fact capital allowances are only
valuable if the leasing company is a member of a group which has
taxable profits which can be reduced by the capital allowances. At
the moment, many banking groups are unlikely to have sufficient
profits to utilise the tax breaks; and
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By GlobalData• The current low interest rates. Obtaining
capital allowances defers tax which would otherwise be due. This
tax is paid later with the profits from the transaction (either the
rents or from a sale of equipment). This, therefore, equates to a
notional interest-free loan from the government. If interest rates
are low, the value of this notional interest-free loan is less.
Our experience suggests that the leasing
market is adapting to these challenges. Although banks are less
willing to enter into new financings, there has been significant
activity in refinancing existing transactions in recent months
which has, to a large extent, been made more difficult as a result
of the changes mentioned above.
Ultimately, the question of whether new
transactions will be undertaken in any size and volume will depend
on the availability of funding for the traditional players in the
market, as well as the appetite of those part-nationalised banks to
participate in tax enhanced transactions.
The author is a senior associate
at the law firm Norton Rose
