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CHAPTER 5
Corporation Tax
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Taxation of leases
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39. The Principal Act is amended—
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(a) by the substitution of the following section for section 76D:
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“Computation of income and expenses from leases
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76D. (1) In this section and sections 299 and 403—
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‘finance lease’ means a lease which, under generally accepted accounting practice, falls to be treated as a finance lease;
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‘lease’ means a finance lease or an operating lease;
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‘leased asset’ in relation to a lease, means an asset that is the subject of the lease;
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‘lease payments’, in relation to a lease, means amounts payable under the lease to the lessor in relation to the leased asset, and includes—
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(a) any residual amount to be paid to the lessor at or after the end of the lease term and guaranteed by the lessee or by a person connected with the lessee or under the terms of any scheme or arrangement between the lessee and any other person, and
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(b) any amount to be refunded by the lessor at or after the end of the lease term and guaranteed by the lessor or by a person connected with the lessor or under the terms of any scheme or arrangement between the lessor and any other person;
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‘lease term’, in respect of a company, has the meaning given to it by the generally accepted accounting practice in accordance with which that company prepares its accounts;
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‘lessee’ and ‘lessor’, in relation to machinery or plant provided for leasing, mean respectively the person to whom the machinery or plant is or is to be leased and the person providing the machinery or plant for leasing, and ‘lessee’ and ‘lessor’ include respectively the successors in title of a lessee or a lessor;
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‘operating lease’ means a lease which, under generally accepted accounting practice, does not fall to be treated as a finance lease.
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(2) Subject to sections 80A and 299, Chapter 8 of Part 4, and subsection (4), for the purposes of computing income of a company from a trade of leasing, the income of a lessor from a finance lease—
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(a) shall not be the amount of income from the lease computed in accordance with generally accepted accounting practice, and
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(b) shall be computed, subject to the provisions of the Corporation Tax Acts other than section 76A, by treating—
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(i) the total lease payments receivable in respect of the lease as trading receipts of the trade arising evenly over the lease term, and
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(ii) as trading expenses of the trade any disbursements or expenses laid out or expended for the purposes of earning those lease payments.
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(3) Subject to sections 80A and 299, Chapter 8 of Part 4, and subsection (4), for the purposes of computing the trading profits of a company which is the lessee in respect of a leased asset that is employed in that trade, the amount to be deducted in computing the profits or gains of a lessee—
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(a) shall not be the lease related expenses or charges in respect of the lease computed in accordance with generally accepted accounting practice, and
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(b) shall be computed, subject to the provisions of the Corporation Tax Acts other than section 76A, by treating the total lease payments payable in respect of the lease as an expense of the trade laid out or expended evenly over the lease term, and no amount shall be prevented from being deducted by virtue only of the fact that for accounting purposes it was taken into account in determining the value of an asset.
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(4) (a) Subject to paragraph (b), where, during the lease term, there is a change to the lease term or the amount of the lease payments, then in the accounting period in which the change occurs—
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(i) the amount of income under subsection (2), or
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(ii) the amount to be deducted under subsection (3),
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shall be recalculated.
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(b) Where the amount of the lease payments is dependent upon any change in facts or matters arising, after the commencement of the lease, the recalculation referred to in paragraph (a) shall—
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(i) where the change in facts or matters arising relates to the accounting period in which the change occurs, cause the lease payments in respect of that accounting period to be increased or decreased, as the case may be, and
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(ii) where the change in facts or matters arising relates to more than one accounting period, cause the lease payments in respect of the accounting periods to which that fact or matter arising relates to be recalculated such that the increase or decrease, as the case may be, is spread evenly over those accounting periods.
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(5) Notwithstanding subsections (2) and (3), where a rebate of lease payments, other than as referred to in paragraph (b) of the definition of ‘lease payments’, is payable or receivable on the termination of a lease, the amount of that rebate shall be—
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(a) in respect of the lessor, deductible in the year in which it is paid or accrued, whichever is the later, and
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(b) in respect of the lessee, taxable in the year in which it is received or accrued, whichever is the earlier.”,
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(b) in section 77, by the insertion of the following subsection after subsection (3):
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“(3A) In respect of a company that carries on a leasing activity in respect of which the company is within the charge to corporation tax under Case IV of Schedule D, in computing the income from such leasing activity so chargeable, section 76(5)(b) shall not prevent the deduction of yearly interest.”,
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(c) in section 288—
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(i) by the insertion of the following subsection after subsection (1):
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“(1A) Notwithstanding subsection (1) and subject to this section, where either of the following events occur in the case of any machinery or plant in respect of which an initial allowance or a wear and tear allowance has been made for any chargeable period to a person carrying on a trade—
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(a) after the setting up and before the permanent discontinuance of the trade, the entering into a lease of machinery or plant, as lessor, on the terms described in section 299(1), notwithstanding the fact that the machinery or plant has not ceased to belong to the person carrying on the trade, or
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(b) after the setting up and before the permanent discontinuance of the trade the right to use the machinery or plant reverts to a lessor following the conclusion of a relevant lease (within the meaning of section 299) in respect of which a valid election or claim under section 299 was made, notwithstanding the fact that the machinery or plant belonged to the lessor—
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(i) prior to entering into the relevant lease,
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(ii) during the term of the relevant lease, and
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(iii) following the conclusion of the relevant lease,
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and did not belong to the person carrying on the trade,
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a balancing allowance or a balancing charge shall, in the circumstances mentioned in this section, be made to or, as the case may be, on that person for the chargeable period related to that event.”,
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(ii) in subsection (2), by the substitution of “Subject to subsection (6B), where there are no sale” for “Where there are no sale”, and
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(iii) by the insertion of the following subsection after subsection (6A):
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“(6B) (a) For the purposes of subsection (2), in the case of an event referred to in subsection (1A)(a) occurring, an amount calculated as the higher of—
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(i) the open-market price (within the meaning of section 289(1)) of the machinery or plant, and
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(ii) the discounted present value of the lease payments under the lease, where the payments are discounted at the interest rate implicit in the lease under generally accepted accounting practice,
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shall be deemed to be sale, insurance, salvage or compensation moneys arising on entering into the lease.
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(b) For the purposes of subsection (2), in the case of an event referred to in subsection (1A)(b) occurring, an amount calculated as the higher of—
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(i) the open-market price (within the meaning of section 289(1)) of the machinery or plant, and
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(ii) the amount payable or expected to be payable under a residual value guarantee in respect of the machinery or plant which forms part of a lease accounted for under generally accepted accounting practice at the end of the lease term,
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shall be deemed to be sale, insurance, salvage or compensation moneys arising on the transfer.”,
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(d) in section 299—
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(i) in subsection (1), by the substitution of “relevant lease” for “finance lease (within the meaning of section 76D)”,
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(ii) by the insertion of the following subsection after subsection (1):
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“(1A) For the purpose of this section, a lease shall be a relevant lease where—
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(a) the lease is a finance lease, or
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(b) the lease is an operating lease, and each of the following criteria apply at the inception of the lease:
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(i) under the terms of the lease, the discounted present value of the lease payments which are payable during the lease term amounts to 80 per cent or more of the fair value of the leased asset where the payments are discounted at the relevant rate;
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(ii) the lease term is greater than or equal to 65 per cent of the predictable useful life (within the meaning of section 80A) of the leased asset;
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(iii) the lease is granted on such terms that the use and enjoyment of the leased asset is obtained by the lessee for a period at the end of which it is considered likely that the leased asset will pass to the lessee.
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(c) For the purposes of paragraph (b)(i), the relevant rate shall be the interest rate implicit in the lease under generally accepted accounting practice, but where such rate is unknown to a lessee, the lessee may use the incremental borrowing rate under generally accepted accounting practice.”,
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(iii) in subsection (3)—
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(I) by the substitution of the following paragraph for paragraph (a):
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“(a) In this section, ‘fair value’, in relation to a leased asset, means an amount equal to such consideration as might be expected to be paid for the asset at the inception of the lease on a sale negotiated on an arm’s length basis, less any grants receivable by the lessor towards the purchase of the asset.”,
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(II) in paragraph (b), by the substitution of “Where the lessee is an individual, subsection (1)” for “Subsection (1)”, and
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(III) in paragraph (c)—
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(A) in subparagraph (i), by the substitution of “relevant lease” for “finance lease”, and
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(B) by the substitution of “lease term” for “term of the lease” in each place where it occurs,
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and
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(iv) by the insertion of the following subsections after subsection (3):
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“(4) Where this section applies and the lessor is a company, the amount to be included in the income of the lessor in respect of a relevant lease shall be—
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(a) where the relevant lease is a finance lease, the amount of income from such a lease computed in accordance with generally accepted accounting practice, or
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(b) where the relevant lease is an operating lease, the amount of income from such a lease as would be computed in accordance with generally accepted accounting practice if the relevant lease was a finance lease.
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(5) Subsection (4) shall only apply to a lessor, in respect of a relevant lease, where—
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(a) notwithstanding the provisions of subsection (1), the leased asset belongs to the lessor—
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(i) immediately prior to the lessor entering into the relevant lease, and
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(ii) throughout the relevant lease term,
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(b) the lease is on the terms described in subsection (1),
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(c) the lessor acquired the leased asset by way of a bargain made at arm’s length,
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(d) the leased asset is not new machinery or plant for the purposes of an election by the lessor under section 290,
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(e) the relevant lease has been entered into by way of a bargain made at arm’s length,
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(f) where the lessee is not tax resident in the State, it is reasonable to consider that the amount which may be taken into account by the lessee as an expenditure or expense, or which may otherwise be deducted, allowed or relieved in computing the profits or gains on which tax falls finally to be borne for the purposes of foreign tax (within the meaning of section 835Z(1)) is similar to that calculated under subsection (3) and not similar to that calculated under section 76D,
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(g) it is reasonable to consider that the relevant lease—
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(i) has been entered into for bona fide commercial reasons, and
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(ii) does not form part of any arrangement or scheme of which the main purpose, or one of the main purposes, is the avoidance of tax,
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and
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(h) the lessee—
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(i) is an individual, an election is made under subsection (3)(b) and the information specified in subsection (9) is provided in the return required to be delivered under Part 41A, or
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(ii) is not an individual, a claim is made in the return required to be delivered under Part 41A and, where the lessor and lessee are both within the charge to tax under Schedule D, the lessor and lessee jointly agree in writing at the commencement of the relevant lease that, under the terms of the relevant lease, the burden of wear and tear of the machinery or plant in fact falls directly on the lessee.
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(6) Subsection (3)(c) shall only apply to a lessee, in respect of a relevant lease, where—
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(a) the relevant lease is—
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(i) an operating lease and the conditions specified in paragraphs (a) to (g) of subsection (5) are satisfied, or
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(ii) a finance lease,
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and
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(b) the lessee—
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(i) is an individual, an election is made under subsection (3)(b) and the information specified in subsection (9) is provided in the return required to be filed under Part 41A, or
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(ii) is not an individual, a claim is made in the return required to be delivered under Part 41A and, where the lessor and lessee are both within the charge to tax under Schedule D, the lessor and lessee jointly agree in writing at the commencement of the relevant lease that, under the terms of the relevant lease, the burden of wear and tear of the machinery or plant in fact falls directly on the lessee.
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(7) In making a claim under subsection (5)(h)(ii) the lessor shall provide the following information in respect of each relevant lease:
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(a) the name of the lessee;
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(b) where—
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(i) the lessee is resident in the State, the tax reference number (within the meaning of section 891B) of the lessee,
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(ii) the lessee is not resident in the State but is, under arrangements that have the force of law by virtue of section 826(1), regarded as being a resident of a territory with the government of which such arrangements have been made, the name of that territory,
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(iii) the lessee is not resident in the State or a territory referred to in paragraph (ii) but is, by virtue of the law of another territory regarded as a resident in that other territory, the name of that other territory, or
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(iv) an entity is not regarded as resident in any territory in accordance with subparagraph (i), (ii) or (iii), the name of the territory under whose laws it was created;
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(c) whether the lessee is an associated enterprise of the lessor for the purposes of Chapter 4 of Part 35C;
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(d) the open-market price (within the meaning of section 289(1)) of the leased asset;
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(e) the discounted present value of the lease payments under the lease and the discount rate used;
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(f) the amount of the capital allowances foregone by the lessor.
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(8) In making a claim under subsection (6)(b)(ii) the lessee shall provide the following information in respect of each relevant lease:
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(a) the name of the lessor;
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(b) where—
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(i) the lessor is resident in the State, the tax reference number (within the meaning of section 891B) of the lessor,
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(ii) the lessor is not resident in the State but is, under arrangements that have the force of law by virtue of section 826(1), regarded as being a resident of a territory with the government of which such arrangements have been made, the name of that territory,
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(iii) the lessor is not resident in the State or a territory referred to in subparagraph (ii) but is, by virtue of the law of another territory regarded as a resident in that other territory, the name of that other territory, or
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(iv) an entity is not regarded as resident in any territory in accordance with subparagraph (i), (ii) or (iii), the name of the territory under whose laws it was created;
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(c) whether the lessor is an associated enterprise of the lessee for the purposes of Chapter 4 of Part 35C;
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(d) the open-market price (within the meaning of section 289(1)) of the leased asset;
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(e) the discounted present value of the lease payments under the lease and the discount rate used;
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(f) the amount to be deducted in computing the profits or gains to be charged to tax under Case I of Schedule D in the period in respect of which the return is made;
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(g) the amount of the capital expenditure deemed to have been incurred by the lessee by reason of the relevant lease;
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(h) the wear and tear allowance claim made by the lessee in the period in respect of which the return is made;
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(i) confirmation that a joint agreement has been made in respect of the relevant lease.
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(9) Where an election is made under subsection (3)(b), both the lessor and the lessee shall include the following details in the return required to be made under Part 41A:
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(a) in respect of each relevant lease—
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(i) confirmation that an election under subsection (3)(b) was made,
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(ii) whether the lessor is an associated enterprise of the lessee for the purpose of Chapter 4 of Part 35C, and
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(iii) the open-market price (within the meaning of section 289(1)) of the leased asset;
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(b) the total number of relevant leases to which these provisions apply in the chargeable period (within the meaning of section 959A) to which the return relates;
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(c) the total value of machinery or plant allowances transferred in relation to the leases referred to in paragraph (d);
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(d) the total open-market price (within the meaning of section 289(1)) of the leased asset at the time the allowances referred to in paragraph (c) were originally transferred.
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(10) Notwithstanding the generality of this section, section 539 shall not apply to a lease of machinery or plant other than a lease in respect of which a valid election or claim under this section was made.”,
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(e) in section 396A(1), by the deletion of paragraph (b) of the definition of “relevant trading loss”,
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(f) in section 402(2), by the insertion of the following paragraph after paragraph (c):
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“(d) Where an amount unallowed is carried forward to a succeeding accounting period under section 308(3), and that allowance has been computed in terms of the company’s functional currency pursuant to this subsection, then that allowance in that succeeding accounting period shall be expressed in terms of the currency of the State by reference to the rate of exchange which—
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(i) is used to express in terms of the currency of the State the amount of the profits from the leasing activity for the accounting period in which the allowance is to be set off, or
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(ii) would be so used if there were such income.”,
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(g) in section 403—
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(i) in subsection (1)—
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(I) in paragraph (a), by the insertion of the following definition:
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“ ‘lease adjacent activities’, in relation to a company, means the activities referred to in clauses (II) to (V) of paragraph (d)(ii),”,
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(II) in paragraph (d)(i)—
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(A) in clause (II), by the deletion of “or”,
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(B) in clause (III), by the substitution of “(within the same meaning), or” for “(within the same meaning)”, and
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(C) by the insertion of the following clause after clause (III):
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“(IV) of the company and all companies that are members of the same group of companies construed in accordance with section 411(1),”,
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(III) in paragraph (d)(ii)—
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(A) by the insertion of the following clause after clause (II):
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“(IIA) the provision of finance to a member of the leasing business group (in this clause referred to as ‘the intermediate financing company’) that carries on the activity referred to in clause (II), subject to the following requirements:
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(A) the provision of finance and guarantees by the intermediate financing company is to a member of the leasing business group who carries on activities referred to in clause (I) (in this clause referred to as ‘the borrower company’);
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(B) the moneys provided by the intermediate financing company are moneys which it has borrowed from persons who are not connected with any member of the leasing business group;
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(C) the moneys so provided as referred to in subclause (B) are repaid by the borrower company on the disposal of the machinery or plant.”,
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(B) by the substitution of the following clause for clause (IV):
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“(IV) the disposal of machinery or plant acquired by the company for the purpose of carrying on the activity referred to in clause (I);”,
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(C) by the insertion of the following clauses after clause (IV):
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“(IVA) the disposal of the right to acquire machinery or plant (or an interest therein) of a type which is similar to the type of machinery or plant leased by the leasing business group where, at the time that the contract giving rise to the right to acquire the machinery or plant was entered into it was intended that the machinery or plant would be—
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(A) acquired by the leasing business group, and
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(B) used by the leasing business group for the activity referred to in clause (I);
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(IVB) the disposal by a company of any part of an item of plant or machinery, not including the creation of an interest or a right in or over the plant or machinery, where that plant or machinery was in use by that company for the activity referred to in clause (I);”,
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(D) in clause (V), by the substitution of “clauses (I) to (IVB)” for “clauses (I) to (IV)”, and
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(E) by the substitution for all of the words from and including “then, subject to section 80A(2)(c)” down to and including “adjustment made under section 556(2).” of the following:
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“then, subject to paragraph (c) and section 80A(2)(c), the activities referred to in clause (I) and the lease adjacent activities carried on by such a company shall, for the purposes of this section, be regarded as the leasing business of that company, and references in this section to profits of the leasing business shall be construed as references to the profits arising directly from these activities.”,
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and
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(IV) by the insertion of the following paragraph after paragraph (d):
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“(e) For the purposes of this section, where a company carries on a leasing business, that company shall form a leasing business group with those companies that are relevant to determining its status as a company carrying on a leasing business under paragraph (d).”,
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(ii) by the insertion of the following subsection after subsection (2):
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“(2A) Where the person carrying on the trade of leasing is a company, any lease adjacent activities carried on by that company which would, but for subsection (2), be part of the same trade as the leasing of machinery or plant, shall, for the purposes of subsection (2), be treated as part of the separate trade of leasing.”,
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(iii) in subsection (4)—
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(I) by the substitution of the following paragraph for paragraph (a):
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“(a) A company shall have incurred a relevant leasing loss where—
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(i) the company is carrying on a trade of leasing and incurs a loss in that trade, and
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(ii) any specified capital allowances have been treated by virtue of section 307 or 308 as trading expenses in arriving at the amount of the loss.”,
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(II) in paragraph (b), by the substitution of “For the purposes of paragraph (c)” for “For the purposes of paragraph (a)”, and
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(III) by the insertion of the following paragraph after paragraph (b):
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“(c) Where in an accounting period a company incurs a relevant leasing loss, the relevant amount of that loss shall not be available for relief under—
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(i) section 396A(3), except to the extent that the amount can be used to reduce the income of the leasing business of the company,
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(ii) section 396B, except to the extent that the amount can be used to reduce the relevant corporation tax chargeable on the profits of the leasing business of the company,
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(iii) section 420A, except to the extent the amount can be surrendered by the company for set off against the relevant trading income arising from—
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(I) the leasing of machinery or plant by a company, or
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(II) the leasing business of a member of the company’s leasing business group,
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or
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(iv) section 420B, except to the extent that the amount can be surrendered by the company to reduce the relevant corporation tax chargeable on the profits of the leasing business of a member of the company’s leasing business group.”,
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(iv) by the substitution of the following subsection for subsection (5):
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“(5) (a) Section 305(1)(b) shall not apply in relation to capital allowances other than capital allowances in respect of machinery or plant to which subsection (6) or (7) applies.
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(b) Where a capital allowance in respect of machinery or plant to be made to a company in an accounting period is a specified capital allowance, arising other than in the course of a trade, to which sections 308(4) and 420(2) apply, those allowances shall not be available—
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(i) for relief under section 308(4), except to the extent that the amount can be used against profits of the leasing business of the company, or
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(ii) for relief under section 420(2), except to the extent that the amount can be set off against profits of—
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(I) the leasing of machinery or plant by a company, or
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(II) the leasing business of a member of the company’s leasing business group.”,
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and
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(v) by the insertion of the following subsection after subsection (10):
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“(11) A company, the capital allowances of which are subject to the restrictions in subsection (4) or (5), shall provide the following information, where it is required by the return required under Part 41A:
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(a) details of the specified capital allowances claimed in the period to which the return relates including—
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(i) the amounts claimed, both in the course of a trade and otherwise than in the course of a trade, and
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(ii) where an event referred to in section 288 occurs in relation to an asset on which specified capital allowances are made in the period, details relating to that event including the amount of any balancing allowance or charge made on the asset;
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(b) the amount of any relevant leasing loss, within the meaning of this section, available for set off at the commencement of the period to which the return relates;
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(c) details of any claims of relevant losses made for set off in the period to which the return relates, under section 396(1), 396A or 396B, as the case may be, insofar as those losses pertain to relevant leasing losses;
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(d) details in respect of relevant leasing losses surrendered under section 420A or 420B insofar as those losses pertain to relevant leasing losses, in the period to which the return relates, including details of the relationship between the claimant company and the surrendering company (both within the meaning of section 411(2));
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(e) details of any claims made under section 308(4) in the period to which the return relates, insofar as the capital allowances concerned pertain to specified capital allowances;
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(f) details in respect of capital allowances surrendered under section 420(4) in the period to which the return relates, insofar as those capital allowances pertain to specified capital allowances, including details of the relationship between the claimant company and the surrendering company (both within the meaning of section 411(2));
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(g) where, in the period to which the return relates, a company disposes of machinery or plant in respect of which specified capital allowances were claimed details—
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(i) in respect of any chargeable gain or capital loss arising, or
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(ii) in relation to the appropriation of that asset into trading stock under section 596.”,
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(h) in section 420A(1), by the deletion of paragraph (b) of the definition of “relevant trading loss”,
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(i) in section 555, by the insertion of the following subsection after subsection (3):
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“(4) Where the disposal is of an asset of machinery or plant that is, or has previously been, the subject of a lease on the terms described in section 299(1), the amount of capital allowances to be excluded from the sums allowable as a deduction shall also include the capital allowances that would have been, or may have been, made in respect of that expenditure, but for the transfer of that burden of wear and tear to the lessee.”,
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and
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(j) in section 603—
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(i) in subsection (2)(a), by the substitution of “subject to subsection (5), from the beginning” for “from the beginning”, and
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(ii) by the insertion of the following subsection after subsection (4):
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“(5) Subsection (1) shall not apply to the disposal of machinery or plant, or an interest in machinery or plant, where—
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(a) the machinery or plant was previously the subject of a lease, on the terms described in section 299(1), and
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(b) the person disposing of the asset is or was the lessor in respect of that lease.”.
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