Clause 24 - Companies carrying on businesses of leasing plant or machinery

Part of Finance Bill – in a Public Bill Committee am 5:15 pm ar 12 Mehefin 2012.

Danfonwch hysbysiad imi am ddadleuon fel hyn

Photo of David Gauke David Gauke The Exchequer Secretary 5:15, 12 Mehefin 2012

It will not be the last, I confess.

Clause 24 makes changes to the sale of lessor company legislation to ensure that it remains effective. The sale of lessor company provisions were introduced to prevent groups from turning a temporary tax timing benefit into a permanent tax saving. Companies carrying on a business of leasing plant or machinery are able to defer profits for tax purposes through a claim to capital allowances. In many instances the capital allowances produce tax losses in the lessor company, which can then be used by the wider group to reduce its taxable profits.

Prior to the introduction of the sale of lessor provisions in the Finance Act 2006, the company could be sold to a loss-making group once the allowances were exhausted and the company was about to become tax profitable. Once in the loss-making group the tax profits could be reduced by the new owner’s losses. The sale of lessor provisions address the risk that the leasing profits might escape taxation in the new ownership by bringing an amount equivalent to the deferred profits into charge. After the sale a matching expense restores the timing benefit to the lessor company and prevents the deferred profits from being taxed again.

The changes introduced by the clause will target known schemes involving big ticket leases, where substantial amounts of tax could be at risk. The changes were announced at Budget 2012, with immediate effect to prevent forestalling and to protect other revenues at  risk; draft legislation was also published. However, we have continued to engage with industry groups. That is why we have tabled amendments 15 to 22, which will preserve the intent of the clause, while preventing unintended consequences.

The first change introduced by the clause will prevent the lessor company from carrying back losses arising after the sale against profits derived from the sale of lessors charge. Using those losses against the charge means that the selling group keeps the timing benefit that it has enjoyed. However, the Exchequer has to wait until the losses of the buying group, augmented by the sale of lessors relief, are exhausted before tax can be collected on the deferred profits. The restriction will restore the intended effect of the legislation, in that it will prevent the temporary tax timing benefit from becoming a tax saving.

The second change targets arrangements that exploited a mismatch in definitions, which allowed a ship leasing company to join a tonnage tax group that included the lessee company without breaking its existing group relationship. No charge was calculated under the sale of lessors provisions and the lessor company was able to enter tonnage tax, where profits are computed for tax purposes on the basis of the tonnage of the ship and not on the normal corporation tax basis. As a result, profits deferred for tax purposes up to that point would have fallen out of charge unless special rules within the tonnage tax regime operated to calculate a balancing charge for an asset sold shortly after entry. As introduced, the clause countered that arrangement by triggering the sale of lessors provisions when the company entered tonnage tax.

Representatives of the shipping industry pointed out that that approach could affect companies that entered tonnage tax in circumstances where there is no change in group membership, the lessor company having always been a member of the same tonnage tax group. Amendments 15 to 22 address that, so that the clause will now ensure that, for the purposes of the sale of lessors provisions, there will be a change of ownership when a lessor company enters a tonnage tax group. The amendments will also prevent the possibility that profits could be taxed twice, by preserving any unused relief calculated under the provisions for use against certain balancing charges arising after the company enters tonnage tax.

The changes target contrived arrangements and situations in which there is a risk that tax on profits will be lost, and they preserve the revenue protection provided by the sale of lessors provisions. I hope that the clause will stand part.