B5.416 Leases—anti-avoidance: income into capital schemes and back-loaded leases
There are provisions intended to counter two categories of tax avoidance using leasing:
(i) income into capital schemes (dealt with under CTA 2010, Pt 21, Ch 2 (ss 899–924) and ITA 2007, Pt 11A, Ch 2 (ss 614B–614BY)); and
(ii) back-loaded leases (dealt with under CTA 2010, Pt 21, Ch 3 (ss 925–929) and ITA 2007, Pt 11A, Ch 3 (ss 614C–614CD))
In both cases, the provisions operate by treating the minimum taxable earnings (rental income) as being no less than the income recognised in the lessor's commercial accounts.
The provisions are explained in some detail in HMRC Business Leasing Manual1. The rest of this article contains a brief outline of the rules.
Income into capital schemes
The legislation2 countering income into capital schemes deals with variations3 on the following arrangements:
(a) rentals under the finance lease are set low in the early years of the lease; and
(b) at the end of the desired loan period, the lessee has an option to buy the asset for a capital sum. The sum is the amount needed to pay off the balance of the capital 'loan' with 'interest' after allowing for the low actual rentals already paid4
The lessor recognises the interest each year up to the option date in the accounts, even when it has not been received and even though it may be paid in capital form. For tax purposes the 'interest' in the capital sum may be a capital gain on which capital
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