Clause 127 - Finance leasebacks

Finance Bill – in a Public Bill Committee at 3:30 pm on 25th May 2004.

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Photo of Ruth Kelly Ruth Kelly Financial Secretary, HM Treasury 3:30 pm, 25th May 2004

I beg to move amendment No. 158, in

clause 127, page 112, leave out lines 20 to 23 and insert—

'(1) This section applies in relation to the calculation of the lessor's income or profits for a period of account for the purpose of income tax or corporation tax.

(1A) Where—

(a) an amount receivable in respect of the lessor's interest under the leaseback falls to be taken into account in that calculation, and

(b) that amount is reduced by an amount due to the lessee under the leaseback,

that reduction shall be disregarded when taking the amount receivable into account.

(1B) The amounts receivable in respect of the lessor's interest under the leaseback that fall to be taken into account in that calculation may be disregarded to the extent that they exceed the permitted threshold (whether or not subsection (1A) applies).'.

Photo of Mr John McWilliam Mr John McWilliam Labour, Blaydon

With this it will be convenient to discuss Government amendments Nos. 159 to 181.

Photo of Ruth Kelly Ruth Kelly Financial Secretary, HM Treasury

This is a series of technical amendments to clause 127 and schedule 23, the purpose of which is to ensure that the Bill has the effect that was intended at the time of the Budget announcement. To help the Committee, I shall explain the purpose of the clause and schedule before moving on to explain the purpose of the amendments.

The purpose of clause 127 and schedule 23 is to bring an end to two tax avoidance schemes involving sale and leaseback or lease and leaseback of plant and machinery. Those schemes allowed businesses to obtain an unintended tax advantage by permitting them to claim relief twice for the cost of the plant and machinery. Giving relief twice for the same expenditure is clearly not justifiable. The measure removes the unintended tax advantages by restricting them to those rentals paid under the leasing arrangement. The result is that the cost of the plant or machinery is relieved once and once only.

Corresponding adjustments are made to ensure that lease rentals that are disallowed in tax computations or the business that pays them are not taxed in the hands of the recipient. The clause contains the basic rules for the new measure and the schedule contains transitional provisions to ensure that the new measure applies fairly to existing schemes. Stopping this avoidance will bring in an estimated Exchequer yield of £295 million over three years: £75 million this year and £110 million in each of the following two years.

I turn now to the amendments. The measure applies to complex business arrangements, and after the Bill was published discussions between officials and professional bodies identified some technical defects that should be put right to ensure that the rules will operate as we intended. We are grateful to all concerned for giving up their time to help us to get the measure right. The amendments also include anti-avoidance provisions to ensure that the new rules operate fairly and cannot be avoided. The amendments do not make any change to the policy underlying the measure, but if they were not made the measure would not be as effective or as fair as it should be. I therefore commend the amendments to the Committee.

Photo of Rob Marris Rob Marris Labour, Wolverhampton South West

On a point of order, Mr. McWilliam. Your selected amendments refer to Government amendment No. 181. Will you clarify whether that is intended to be No. 161, because No. 181 refers to schedule 23?

Photo of Mr John McWilliam Mr John McWilliam Labour, Blaydon

Because the schedule arises out of the clause and because of the principle that we have only one argument on anything, the debate takes part on the clause, even though some of the amendments are to the schedule. Those amendments will be formally moved when we get to the schedule.

Photo of Mark Prisk Mark Prisk Shadow Paymaster General

I know that we are all grateful to you for steering our deliberations, Mr. McWilliam.

As the Financial Secretary said, the clause must be considered with schedule 23, which underscores the point that you have just made, Mr. McWilliam. The clause seeks to close down those structures that involve sale and leaseback or lease and leaseback of plant and machinery, which is an important aspect for many of

our more capital-intensive industries. The structures to which the Financial Secretary referred are those businesses that seek to obtain one deduction for the lease payment and one for the capital allowance. I accept that it was an unintended consequence of earlier legislation, and I therefore recognise that the measure's intent has some merit.

Once the Bill was published there were a series of hurried meetings between the Treasury and industry, and if my maths serves me well the results of those are the 20 Government amendments before us. It is a shame that the matter could not have been sorted out before the Bill was published, but I have examined the amendments—some are technical and some have a broader application—and it appears that most of the concerns of those affected by the clause and schedule have been satisfied. For example, one amendment that I considered tabling would have dealt with the question of the net book value and the current book value, and, wearing my chartered surveyor's hat momentarily, I am pleased to see that that has been included.

I do not want to detain the Committee, but we have some concerns about the application of the provisions and their potential impact on bona fide arrangements in a complex field, and especially for the lease and leaseback of plant and machinery. As long as we gain complete assurance that consultations will continue, we will not oppose the amendments in principle.

Photo of Mr Howard Flight Mr Howard Flight Shadow Chief Secretary To the Treasury, Economic Affairs, Shadow Chief Secretary to the Treasury

There were concerns that the measures would be retrospective for people who had already entered into sale and leaseback arrangements, and I would be interested to know whether the amendments address that issue.

Photo of Ruth Kelly Ruth Kelly Financial Secretary, HM Treasury

I thank the hon. Member for Hertford and Stortford for the way in which he accepted the amendments, and I apologise for the fact that so many were needed. Clearly, it is a complex area that quite recently came to our attention, and we needed to get it right. We have consulted and we will continue to do so to ensure that there are no more unintended consequences, but we do not believe that there are. As he said, representatives of organisations believe that we have tackled the problem fairly and reasonably, with the underlying policy intention being well served.

Will innocent transactions be caught? Commercially driven transactions will be within the legislation, but they will be tackled fairly and without the double benefit that could arise under existing rules. Hon. Members will accept that that was never the intention of the original legislation, and that it should stop. The provision will not affect the tax treatment of rental payments due for Budget day, to answer the point raised by the hon. Member for Arundel and South Downs (Mr. Flight). Nor will it affect the tax treatment of payments due after Budget day if they relate to periods before that day, so I do not believe there is any retrospective activity associated with this legislation. I therefore commend it to the Committee.

Amendment agreed to.

Amendments made: No. 159, in

clause 127, page 112, leave out lines 40 to 44.

No. 160, in

clause 127, page 113, line 35, leave out from 'machinery' to end of line 36.

No. 161, in

clause 127, page 113, line 39, at end insert—

'( ) Plant or machinery is not the subject of a lease and finance leaseback for the purposes of this section in any case where the condition in subsection (6)(c) is met only because of an election under section 199 made before 18 May 2004.'.

No. 162, in

clause 127, page 113, line 46, at end insert—

'228G Leaseback not accounted for as finance lease in accounts of lessee

(1) Sections 228B and 228C are subject to this section in their application in relation to a leaseback that is not accounted for as a finance lease in the accounts of the lessee.

(2) Subsection (3) applies where the leaseback is accounted for as a finance lease in the accounts of a person connected with the lessee; and in that subsection ''relevant calculation'' means the calculation of—

(a) the permitted maximum for the purposes of section 228B, or

(b) the amount by which the income or profits of the lessee are to be increased in accordance with section 228C.

(3) Where an amount that falls to be used for the purposes of a relevant calculation—

(a) cannot be ascertained by reference to the lessee's accounts because the leaseback is not accounted for as a finance lease in those accounts, but

(b) can be ascertained by reference to the connected person's accounts for one or more periods,

that amount as ascertained by reference to the connected person's accounts shall be used for the purposes of the relevant calculation.

(4) Subsections (5) and (6) apply in a case where the leaseback is not accounted for as a finance lease in the accounts of a person connected with the lessee.

(5) Sections 228B and 228C do not apply in relation to the leaseback.

(6) If the term of the leaseback begins on or after 18 May 2004 then, for the purposes of income tax or corporation tax, the income or profits of the lessee from the relevant qualifying activity for the period of account during which the term of the leaseback begins shall be increased by—

(a) the net consideration for the purposes of section 228C(3) (in the case of a sale and finance leaseback), or

(b) the consideration referred to in section 228F(6)(b) (in the case of a lease and finance leaseback).

(7) For the purposes of this section the leaseback is accounted for as a finance lease in a person's accounts if—

(a) the leaseback falls, under generally accepted accounting practice, to be treated in that person's accounts as a finance lease or loan, or

(b) in a case where the leaseback is comprised in other arrangements, those arrangements fall, under generally accepted accounting practice, to be so treated.'.

No. 163, in

clause 127, page 114, leave out line 1 and insert—

'228H Sections 228A to 228G: supplementary'.

No. 164, in

clause 127, page 114, line 2, leave out '228F' and insert '228G'.

No. 165, in

clause 127, page 114, line 3, leave out 'current' and insert 'net'.

No. 166, in

clause 127, page 114, line 25, leave out '228F' and insert '228G'.

No. 167, in

clause 127, page 114, line 33, leave out '228F' and insert '228G'.

No. 168, in

clause 127, page 114, line 37, at end insert—

'228J Plant or machinery subject to further operating lease

(1) This section applies where—

(a) plant or machinery is the subject of—

(i) a sale and finance leaseback, or

(ii) a lease and finance leaseback, and

(b) some or all of the plant or machinery becomes, while the subject of the leaseback, also the subject of a lease in relation to which the following conditions are met—

(i) the term of the lease begins on or after 18 May 2004;

(ii) S, or a person connected with S, is the lessee under the lease;

(iii) the lease is not accounted for as a finance lease in the accounts of the lessee.

(2) For the purpose of income tax or corporation tax, in calculating the lessee's income or profits for a period of account the amount deducted in respect of amounts payable under the operating lease shall not exceed the relevant amount.

(3) Subsections (4) and (5) apply in relation to the calculation of the lessor's income or profits for a period of account for the purpose of income tax or corporation tax.

(4) Where—

(a) an amount receivable in respect of the lessor's interest under the operating lease falls to be taken into account in that calculation, and

(b) that amount is reduced by an amount due to the lessee under the operating lease,

that reduction shall be disregarded when taking the amount receivable into account.

(5) The amounts receivable in respect of the lessor's interest under the operating lease that fall to be taken into account in that calculation may be disregarded to the extent that they exceed the relevant amount (whether or not subsection (4) applies).

(6) Where only some of the plant or machinery is the subject of the operating lease, subsections (2) to (5) shall apply subject to such apportionments as may be just and reasonable.

(7) For the purposes of this section a lease is accounted for as a finance lease in a person's accounts if—

(a) the lease falls, under generally accepted accounting practice, to be treated in that person's accounts as a finance lease or loan, or

(b) in a case where the lease is comprised in other arrangements, those arrangements fall, under generally accepted accounting practice, to be so treated.

(8) In this section—

''lease and finance leaseback'' has the meaning given in section 228F;

''lessee'' means the lessee under the operating lease;

''lessor'' means the lessor under the operating lease;

''operating lease'' means the lease referred to in subsection (1)(b);

''relevant amount'' means an amount equal to the permitted maximum under section 228B as it applies in relation to the leaseback.'''.

No. 169, in

clause 127, page 114, line 38, leave out '228G' and insert '228J'.—[Ruth Kelly.]

Clause 127, as amended, ordered to stand part of the Bill.