© 2004 KPMG LLP, a UK limited liability partnership and the UK member firm of KPMG International, a Swiss cooperative. All rights reserved. The KPMG logo and name are trademarks of KPMG International. Double benefit leasing – Update PFI and new capital allowances regime Martin Oakes Tax Director

2 © 2004 KPMG LLP, a UK limited liability partnership and the UK member firm of KPMG International, a Swiss cooperative. All rights reserved. Sale/Lease and Finance Leaseback Asset purchase Sale/ Head lease UK Co Finance lessor Finance lease Cost 120 MV £100 TWDV £40

3 © 2004 KPMG LLP, a UK limited liability partnership and the UK member firm of KPMG International, a Swiss cooperative. All rights reserved. Summary of New Rules in Finance Bill New rules to apply to rental payments due on or after 17 th March 2004 in respect of SALBs and LALBs Lessee’s deductions limited to “Permitted Maximum” SALB: finance charges and CA disposal value; Lessor’s income limited to finance income and CA disposal value LALB – lessee’s deductions & lessor’s income limited to finance charges Termination rentals allowed (subject to cap) but… Exit charge on termination: deemed income receipt on amount that would not have been allowed had the lease run to term

4 © 2004 KPMG LLP, a UK limited liability partnership and the UK member firm of KPMG International, a Swiss cooperative. All rights reserved. Developments since 19 th April 2004 Some 20 amendments made to the Finance Bill before enactment Extension of rules to cover some other circumstances…

5 © 2004 KPMG LLP, a UK limited liability partnership and the UK member firm of KPMG International, a Swiss cooperative. All rights reserved. Key further items included in Finance Act 2004 New Sections 228G and 228J to target arrangements not dealt with in the Finance Bill The leaseback is not accounted for in the accounts of the lessee as a finance lease There is a SALB or LALB but, in addition, the equipment is the subject of another lease not accounted for as finance lease in the accounts of the lessee Introduction of a capital gains relief for lease and leaseback deals

6 © 2004 KPMG LLP, a UK limited liability partnership and the UK member firm of KPMG International, a Swiss cooperative. All rights reserved. Section 228G – Circumstance 1 Parent Subsidiary RV guarantee Lessor Operating lease Sale

7 © 2004 KPMG LLP, a UK limited liability partnership and the UK member firm of KPMG International, a Swiss cooperative. All rights reserved. Section 228G – Circumstance 2 Third Party Lessee RV guarantee Lessor Operating lease Sale

8 © 2004 KPMG LLP, a UK limited liability partnership and the UK member firm of KPMG International, a Swiss cooperative. All rights reserved. Section 228G - Remedies Circumstance 1 – The lessee is to derive amounts required for “relevant calculations” from the connected person’s accounts where possible Circumstance 2 – There is no connected person so not possible to derive amounts required if the leaseback begins on or after 18 May 2004, lessee taxable on double benefit in year leaseback starts; If the leaseback begins before, 18 May 2004, no adjustment required

9 © 2004 KPMG LLP, a UK limited liability partnership and the UK member firm of KPMG International, a Swiss cooperative. All rights reserved. Section 228J – Circumstance 1 Lessor S Finance lease B Sale Operating Lease On or after 18 May 2004

10 © 2004 KPMG LLP, a UK limited liability partnership and the UK member firm of KPMG International, a Swiss cooperative. All rights reserved. Section 228J – Circumstance 2 UK 1 Forco 2 Forco 1 Sale Finance lease On or after 18 May 2004 UK 2 Operating lease UK connected Finance lease

11 © 2004 KPMG LLP, a UK limited liability partnership and the UK member firm of KPMG International, a Swiss cooperative. All rights reserved. Section 228J - Remedies For transactions entered into on or after 18 May 2004 Conditions: P&M subject to SALB or LALB P&M also subject of lease to a person connected with S Who does not account for the lease as a finance lease Lessee’s deductions limited to the “Relevant Amount” (“permitted maximum”) Lessor’s income: amounts receivable to be disregarded to the extent exceed “Relevant Amount”

12 © 2004 KPMG LLP, a UK limited liability partnership and the UK member firm of KPMG International, a Swiss cooperative. All rights reserved. Capital allowances and PFI Present position for project assets for PFI contracts Tax treatment determined on the facts of each case but broadly: Three basis of accounting under UK GAAP with various possible tax outcomes Fixed asset (FRS 5) -CAs Finance debtor (FRS5) -CAs**/composite trade Finance lease (SSAP 21) - CAs** Items ** treated as “finance leases or loans” for section 219 CAA 2001 so that (for example) time apportionment applies

13 © 2004 KPMG LLP, a UK limited liability partnership and the UK member firm of KPMG International, a Swiss cooperative. All rights reserved. Capital allowances and PFI Background – August 2003 Condoc Entitlement to capital allowances might be transferred from lessor to lessee for leases that were “essentially financing transactions” Statutory Definition: covering all finance leases and small proportion of leases that although accounted for as operating leases are essentially financing transactions. Where the statutory definition applied, lessor to be taxed on finance elements of rents; lessee would deduct finance costs and receive capital allowances

14 © 2004 KPMG LLP, a UK limited liability partnership and the UK member firm of KPMG International, a Swiss cooperative. All rights reserved. Capital allowances and PFI Applying the Condoc approach to UK GAAP treatments for project assets Fixed asset (FRS 5) -CAs OK Finance debtor (FRS5) -CAs???/composite trade Finance lease (SSAP 21) - CAs???

15 © 2004 KPMG LLP, a UK limited liability partnership and the UK member firm of KPMG International, a Swiss cooperative. All rights reserved. Capital allowances and PFI Applying the Condoc approach to IAS accounting treatments IAS IFRIC committee considering accounting of PPP/PFI assets and presently no equivalent of FRS 5 Note F IFRIC discussion papers issued in discussed the certain models

16 © 2004 KPMG LLP, a UK limited liability partnership and the UK member firm of KPMG International, a Swiss cooperative. All rights reserved. Capital allowances and PFI Applying the Condoc approach to IAS accounting treatments Fixed asset (IAS 16) -CAs OK Finance debtor (IAS32/39) -CAs???/composite trade Finance lease (IAS 17) - CAs??? Intangible assets basis (IAS 38) -FA 2002 Sch 29** ** No acceleration