Developments in EU tax case law were probably
the prime driver for changes to such unfairness and certainly
contributed to the abolition of these capital allowance
restrictions as part of the package of measures that saw the
introduction of the long-funding lease regime.
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Accordingly, subject to some specific
restrictions, from 1 April 2006 it has been possible to claim
capital allowances on equipment leased under non-long funding
leases to non-residents.
The starting point to establish such a claim
is that the lease should not be a long-funding lease, which is
achievable for finance leases with terms up to seven years which
have straight line rentals and a residual value of not more than 5
percent. There are no such rental and residual restrictions for
leases with terms up to five years and this may deliver some timing
benefits through capital allowances.
The rules, however, on operating leases are
more complex. Two significant provisions should be considered.
First, the international leasing restrictions apply where a UK
resident lessor has an asset via a long-funding lease or hire
purchase contract from a non-resident lessor.
The UK intermediate lessor leases the asset to
a non-resident lessee under what would otherwise be non
long-funding lease on which they could claim capital
allowances.
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By GlobalDataWhere the sole or main purpose of the
arrangement is to secure such allowances, then the lease to the
non-resident lessee will be deemed to be a long-funding lease and
the UK lessor will not have an entitlement to claim allowances.
The second provision is where a UK lessor
acquires equipment by way of a sale and finance leaseback, which
may include a transaction with a non-resident lessee. In this case,
such a leaseback will automatically be treated as a long-funding
lease.
Again, the UK lessor will not be entitled to
claim capital allowances. This is subject to a joint election by
the lessor and lessee to disapply this treatment for equipment up
to four months old.
A word of caution to be considered by UK
capital allowance lessors is whether such a cross-border lease is
disclosable under the UK disclosure of tax avoidance schemes rules,
under the leasing hallmark.
These rules apply to certain proposals and
arrangements including certain cross-border leases. The lessor
should ensure they have the necessary procedures in place to comply
with these regulations. Overall, for many lessors the current rules
represent a more balanced set of provisions than the old rules and
allow capital allowances to be claimed in a reasonable number of
circumstances.
Jonathan Vines
The author is a tax partner at KPMG LLP
