Over the years, the UK leasing industry has been affected
by changes to the tax rules and judgments handed down by the
courts. The government is consulting on introducing a new general
anti-abuse rule (GAAR) in Finance Bill 2013.
The proposed GAAR will
only apply to transactions which would otherwise produce an
‘abusive’ UK tax advantage. The aim of the GAAR is to counteract
these tax advantages. It is worth noting that the GAAR may apply to
pre-existing transactions, so even though the GAAR has not been
finalised, UK-based lessors and lessees should consider its
potential impact on any new transactions they enter
into.
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Traditionally, UK
lessors have often structured leasing finance transactions to
ensure that the lessor obtains capital allowances, which is the
type of tax relief available for depreciation in the UK.
This has been
particularly important where lessee groups have not been
sufficiently profitable to utilise capital allowances. The capital
allowances regime contains a number of anti-avoidance rules
targeted at specific transactions. It also contains a number of
targeted anti-avoidance rules (for example, where an asset is sold
by a business and leased back, capital allowances are restricted if
avoidance is a main purpose of the transaction – see Leasing
Life 224, May 2012). It is not expected that the introduction
of a GAAR would be used as an opportunity to simplify the
rules.
In addition, Her
Majesty’s Revenue & Customs has challenged the tax treatment of
certain leasing transactions before the courts (for example, a
recent case considered whether a leasing partnership was trading
–see Leasing Life 225, June 2012). A GAAR is unlikely to
reduce the number of cases before the courts but would add an
additional layer of complexity to any dispute.
The GAAR will only
apply to abusive tax arrangements. This is defined as any
arrangement which has a main purpose of obtaining a UK tax
advantage which cannot reasonably be regarded as a reasonable
course of action.
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By GlobalDataIn determining whether
a transaction is an abusive one, it will be necessary to consider
the background to the relevant tax legislation; so for example, any
principles on which the legislation is based and any policy
objectives. When a court considers the application of the GAAR, it
will be required to consider any guidance (which will be approved
by an advisory panel consisting of employees of HMRC and people
with other relevant experience) and any view the advisory panel has
expressed in respect of the transaction in issue. The burden of
proving that the GAAR should apply lies with HMRC.
The draft consultation
document contains a number of examples of cases which HMRC have
lost before the courts which the GAAR is intended to apply to. None
of these examples provide much assistance in illustrating how a
GAAR would apply to a leasing transaction. Before the GAAR is
introduced, detailed guidance will be published.
Our view is that the
decision to lease an asset (for example under a five-year finance
lease) rather than to borrow to buy an asset, should not normally
be an abusive tax arrangement, even where the lessee would not be
able to use the capital allowances resulting from the asset itself.
We also expect that structuring a finance lease so that it has a
term of five years (rather than say, a term of five years and one
day) to ensure that it is not a long funding lease should not
typically be caught by the GAAR. The position for more structured
leasing arrangements will need to be considered carefully on a case
by case basis.
There is still a
significant amount of work to be done for Finance Bill 2013 to
contain a GAAR. The current consultation runs until 14 September
2012. Arguably, the most important issue to be resolved before a
GAAR is introduced is how to define what constitutes an abusive
transaction.
The answer will be
dealt with to a large extent in the guidance. Before the guidance
can be drafted, the advisory panel (who approve the guidance) must
be appointed. The consultation document contains scant information
about the types of person who will be members of the advisory
panel. Given the importance of defining what constitutes an abusive
arrangement correctly, it is hoped that once the advisory panel is
appointed and guidance is produced, there will be a further
consultation as to the content of the guidance.
Once the guidance is
published the leasing industry will have a clearer idea of the
impact of a GAAR. It is hoped that this guidance will provide
reassurance that common commercial leasing transactions are not
caught. This would be in line with the principles behind the
introduction of a GAAR – in that it is not intended to catch normal
commercial arrangements.
Judy Harrison is a
senior associate with law firm Norton Rose
