Changes to Schedule 10 and debt capital
welcomed by lessors
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Most equipment items acquired over the 12
months up to 31 March 2010 will qualify for a 40 percent first-year
allowance (FYA). A qualifying taxpayer will therefore be able to
write off twice as much of the cost in its current accounting year
than it would with the previous 20 per cent annual writing down
allowances (WDAs).
Assets acquired for leasing will, however, be
excluded, along with long life assets (ie those eligible for 10 per
cent WDAs) and business cars. This will affect all transactions
where it is the lessor who claims CAs – which include most
operating leases and all leases running for up to five years.
Where asset finance customers are themselves
eligible for CAs, under hire purchase contracts and long funding
leases (LFLs), they will be entitled to the FYA on the same basis
as owner-users purchasing outright.
However, the temporary enhancement will not
affect many small business CA claimants as the permanent annual
investment allowance (AIA) already gives them a 100 per cent first
year write-off on up to £50,000 (€55,650) worth of annual spending
on equipment.
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By GlobalDataTarun Mistry, director and head of leasing and
asset finance at Grant Thornton, the accountants, said: “Excluding
leasing from this kind of incentive seems quite unjustified. It
will be a huge disappointment to the leasing industry, which
lobbied strongly for such a stimulus.”
Also, some draft legislation, published with
the pre-Budget report statement last November, was designed to
block avoidance techniques based on LFLs.
On Budget day, HM Revenue & Customs (HMRC)
announced in descriptive terms some proposals to amend those draft
clauses, but without giving the detail of revised clauses.
It was also announced that “definitions of
sale and leaseback in existing anti-avoidance legislation will be
amended for consistency [with a provision in the draft clauses] and
to achieve their objectives”.
Draft changes to schedule 10 – which works by
applying a special tax charge to the selling group, and giving a
corresponding relief to the buying group – included the application
of its governing rules to complex transactions involving leasing
companies trading in partnerships, or owned by consortia. Jonathan
Vines, tax partner at KPMG, described this as a “minor tidying up”.
Another amendment will extend the period during which tax losses
derived from relief to the purchasing company under Schedule 10 can
be surrendered to other companies in its group, and preserves the
value of the relief by indexation through that period.
“This is welcome, and honours a commitment
made by HMRC in earlier consultations,” said Vines.
There was also some welcome reassurance on
possible leasing implications of a set of anti-avoidance rules
targeted elsewhere.
Draft legislation published last December
proposed a cap on worldwide debt subject to tax relief for interest
payments, where highly leveraged foreign owned companies trade in
the UK.
One provision of these draft clauses was
designed to exclude from the debt cap the funding of finance leases
and commercial lending business. This will now be extended to the
funding of subsidiaries with operating lease portfolios.
George Tonks, partner of the Invigors
consultancy, said: “The worldwide debt cap is an anti-avoidance
measure.
“It was felt necessary in conjunction with the
removal of additional UK tax charges on foreign profits, which is
designed to make the UK much more attractive as a corporate HQ
location.
“It was not meant to catch the funding of
finance business, and the need for this latest change on operating
leases was identified during consultations with HMRC.”
Andy Thompson
