(Except Clauses 7, 8, 9, 11, 14, 16, 20 and 92) - Clause 62

Finance Bill – in a Public Bill Committee on 16th June 2009.

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Sale of lessor companies etc: anti-avoidance

Question proposed,That the clause stand part of the Bill.

Photo of Jimmy Hood Jimmy Hood Labour, Lanark and Hamilton East

With this it will be convenient to discuss the following: that schedule 31 be the Thirty-first schedule to the Bill.

Photo of Greg Hands Greg Hands Shadow Minister (Treasury)

I begin by welcoming you back to the Chair for this afternoon’s sitting, Mr. Hood.

We are in the middle of a set of clauses that relate to anti-avoidance, with another three to go. Clause 62 and schedule 31 are anti-avoidance measures, designed to prevent the creation of leases that only ever make losses.

Anti-avoidance provisions were introduced in schedule 10 to the Finance Act 2006 in relation to changes in the ownership of companies carrying on a leasing business. Before that legislation was passed, a tax advantage could arise when a lessor company was sold to a group that expected to have tax losses available for surrender by way of group relief. The 2006 Act made provision to target changes in the economic ownership of a plant or machinery leasing business carried on by a company on its own or in partnership. That legislation applies to simple sales of shares in a leasing company and to changes in partnership sharing arrangements, in addition to any other route by which the economic ownership of a business could be changed.

The legislation aims to prevent an unacceptable permanent deferral of tax. It was previously possible for a leasing company to generate losses in the early years of a long leasing contract as a consequence of the availability of capital allowances, with such losses being available for group relief. In the later years of the lease, the capital allowances would be reduced and the company would become profitable. If the leasing company was sold in the interim to a loss-making company or group, the leasing company’s profits would be covered by the new owner’s losses. Thus, an acceptable temporary deferral of tax became a permanent deferral of tax.

The tax advantage arose because the tax relief available via capital allowances normally exceeds the commercial depreciation at the outset of a lease. The timing advantage reverses later in the lease period. The effect of the  accelerated capital allowances is that a lessor company will often realise tax losses to begin with, which will be available for surrender by way of group relief. Therefore, the sale of lease-tails, when a lessor company is sold to a group with tax losses, had the effect that no tax was payable on the profits arising in later periods on the reversal of the capital allowances.

The 2006 Act tried to counter that practice by ensuring that an accounting period ends on the sale of a lessor company. The company is treated as receiving income in the accounting period ending on the change of ownership, to the extent that the tax written down value of the assets is less than the account’s value. A deduction of the same amount arises in the next accounting period of the lessee company.

Schedule 31 includes Government proposals to change the 2006 Act, most of which should ensure that the legislation works as intended in all circumstances, including in complex transactions. Schedule 10 to the 2006 Act introduced a charge for lessor companies when sold to recover the tax timing advantage they received from capital allowance claims. That charge was an amount of income introduced by reference to the difference between the balance sheet value of assets owned by the lessor company and their tax written down value—that is, the amount still eligible for capital allowances. Clearly, if the lessor company did not own the assets, the balance sheet value of assets would be zero.

Lessor companies had been trying to avoid the consequences of schedule 10 to the 2006 Act by entering into sale and leaseback arrangements so that they no longer owned the asset subject to the lease, but could still claim capital allowances. I understand that schedule 31 removes the requirement for the lessor company to own the asset and makes provisions for ascertaining the value of an asset that may not be on the company’s balance sheet. The changes apply to all accounting periods that end on or after 22 April 2009, and we support the changes proposed.

Photo of Stephen Timms Stephen Timms Financial Secretary (HM Treasury) (also in the Department for Business, Innovation and Skills)

I, too, bid you a warm welcome to the Chair for our deliberations this afternoon, Mr. Hood. I am grateful to the hon. Member for Hammersmith and Fulham for setting out what the clause does, but let me add a little to what he has said.

The sale of lessor companies legislation, which was introduced Finance Act 2006, prevents a potential loss of tax when a lessor company is sold. It does that by bringing into charge an amount that reflects the difference between the value for capital allowances purposes and the commercial accounting value of assets that the company owns. Where the lessor company is an intermediate lessor—one that leases an asset in from one party and leases the same asset out to another party—it may be able to claim capital allowances even though it does not own the assets that it leases out. It therefore benefits from the capital allowances in the same way as a lessor company that owns the assets, but because it does not own the asset, the legislation fails to bring the appropriate amount into charge when the company is sold.

We gather from disclosures under the tax avoidance scheme disclosure rules that groups have entered into sale and leaseback arrangements that turned what was a  head lessor—a company that owned the leased asset—into an intermediate lessor before selling the lessor company. The arrangements made it possible to sell a lessor company without incurring a schedule 10 charge, but the changes we propose will ensure that the legislation captures an appropriate charge even when the lessor company does not own the asset it leases.

The legislation was first published in draft on 13 November 2008, and has been effective from that date. I am pleased to say that HMRC has received no negative representations about it.

Question put and agreed to.

Clause 62 accordingly ordered to stand part of the Bill.

Schedule 31 agreed to.