‘(7) Where a person prepares or is required to prepare accounts in accordance with new standards for a period of account, the Taxes Acts (other than this section) have effect as if the person prepared or was required to prepare accounts, for that period, in accordance with the corresponding old standards.
(8) For the purposes of subsection (7)—’.
Clause 53 introduces legislation to ensure that the existing tax rules that rely on the accounting treatment of lease transactions continue to operate as they currently do. Much of the corporation tax and income tax code for lease transactions is based on accounting definitions and the resulting entries in accounts prepared in accordance with either UK generally accepted accounting practice or international accounting standards.
Fundamental changes to lease accounting are expected in international accounting standards during 2011. The changes proposed will remove the distinction between finance leases and operating leases, amend or remove other currently defined terms and alter the way that amounts are quantified for accounts purposes.
UK generally accepted accounting practice may also introduce similar fundamental changes to lease accounting as early as 2013. If the proposals go ahead as planned, the current tax rules will not work as originally intended and, in some situations, will not work at all.
Clause 53 will require businesses that account for lease transactions to treat them, for tax purposes, as if the proposed changes to lease accounting had not taken place. The clause will apply to any business, whether as lessee or lessor or both, that accounts for lease transactions using a lease accounting standard that is newly issued or changed on or after 1 January 2011. The clause is not intended to alter the current tax treatment of leases in any way, and as such is expected to be revenue neutral.
Amendments 185 and 186 ensure that the clause operates correctly in all cases. The draft legislation was published for consultation in December 2010. No comments were received during the consultation period. As such, the legislation was unaltered when the Finance Bill was published in March. However, it has recently been brought to our attention that in certain limited circumstances, when a business chooses to change from one standard to the other, it would be required to ignore the move for all tax purposes, not just for purposes related to the taxation of leases. That would create not only an administrative burden for the business but also potential avoidance opportunities, as profits might be deferred or removed entirely from the tax net. To prevent this unintended consequence, the amendments will ensure that the generally accepted accounting practice that a business uses for calculating taxable profits is the same as that used in the accounts for all matters except for leasing transactions. The proposed amendment also simplifies the legislation.
Clause 53 is an interim measure. When the dust has settled and we have some certainty regarding the accounting changes, we will review the appropriate way forward for leasing taxation in the light of the new rules. The review will focus on providing stability and certainty for the future, and, of course, any consultation would be carried out under the new tax policy-making framework.
The clause will require tax profits and losses for lease transactions to be calculated as they are currently, irrespective of any changes made to the way the lease transactions are accounted for. This will provide some clarity to businesses involved in those transactions in the interim period before the new accounting standards are introduced. I therefore commend the clause and I urge the Committee to accept the amendments.