Capital allowances ― sale and leaseback arrangements

By Tolley in association with Martin Wilson, the Capital Allowances Partnership Limited
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The following Corporation Tax guidance note by Tolley in association with Martin Wilson, the Capital Allowances Partnership Limited provides comprehensive and up to date tax information covering:

  • Capital allowances ― sale and leaseback arrangements
  • Background
  • Sale and leaseback
  • Exemption for manufacturers and suppliers
  • Election under section 227

Background

Allowances are available to a person leasing plant to a third party, whether that is as part of a plant hire business or merely incidental to some other activity. Most commonly, fixtures and other plant may effectively be leased to the tenant of a property by the landlord. In such cases, it is of no consequence whether or not there is a separate lease of the fixtures, nor indeed whether the fixtures are mentioned in the lease.

Sale and leaseback arrangements were unsuccessfully challenged by HMRC in Barclays Mercantile Business Finance Ltd v Mawson and BMBF (No 24) Ltd v IRC. As a result of the taxpayer’s success in this case, it is accepted that allowances are available, even where the availability of those allowances is a fundamental reason for the acquisition of the plant by the lessor.

Barclays Mercantile Business Finance Ltd v Mawson (Inspector of Taxes) [2005] STC 1; BMBF (No 24) Ltd v IRC [2002] STC 1450 (both subscription sensitive)

The transaction in BMBF which relied on the future lease payments being deposited as cash collateral was specifically blocked in 1998 by a risk-based test in what is now CAA 2001, s 225.

Sale and leaseback

In the absence of specific legislation, it would be possible for taxpayers to effectively achieve an uplift in the amount qualifying for allowances by selling plant to a third party and leasing it back, with the additional tax saving at least partly reflected in the quantum of lease payments (themselves qualifying for tax relief). Specific provisions in the Capital Allowances Act 2001 therefore apply to restrict the allowances available on sale and leaseback arrangements.

Although the rules are commonly referred to as addressing sale and leasebacks, they are in fact more widely drafted.

These special rules apply where plant is

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