CT Reform London 27 January 2005 Leasing Reform Paul Lane Inland Revenue Business Tax

Where we are now Detailed consultation on leasing reform since August 2003 The Government has decided - to reform the taxation of leased plant and machinery that legislation will be in Finance Bill 2006 Draft core legislation published Further consultation on the detail of the new regime

Leases within new regime New regime will apply to leases that are essentially financing transactions (“funding leases”) mainly to finance leases but to some operating leases But need not apply to shorter leases, perhaps - where lease is less than 4 years in some cases where lease is between 4 and 6 years So it will apply to “long funding leases”

Funding lease definition Objective would not be met if applied new regime only to finance leases Propose 4 rules defining a funding lease - building on accountancy concepts The detail of these rules is under discussion Definition of shorter leases also under discussion

New regime - finance leases Basis of commercial substance Lessor taxed on accounting measure of income Lessee entitled to capital allowances and deduction for finance charges

New regime - operating leases Lessor taxed on gross rentals and allowed a deduction to reflect reduction in asset value over life of lease Lessee entitled to capital allowances but deduction for lease rentals restricted

Consequences Abolition of overseas leasing rules Changes to time apportionment of capital allowances in year of acquisition of finance leased assets What else?

Open issues Definition of long funding leases Transitional issues Independent classification - or not Chains of leases Fixtures

Way forward Plenty of time for discussion Specific examples of potential difficulties More group meetings? Individual meetings?