Anti-avoidance

Plant and machinery leasing - anti-avoidance

New anti-avoidance will be introduced to take effect from 13 November 2008, the date the draft legislation was published. It is aimed at blocking disclosed avoidance schemes involving capital allowances on the sale and leaseback, or long funding leases, of plant or machinery.

Sale of lessor companies

This measure blocks a planning scheme that uses a sale and leaseback arrangement, prior to the disposal of a lessor company, in order for the selling group to retain the benefit of writing down allowances claimed.

A charge, and a matching relief, is currently imposed where a lessor company changes ownership. The charge is calculated based on the difference between the balance sheet value and tax written down value of plant and machinery owned by the lessor company.  The charge recaptures the timing benefit derived from capital allowances claimed by the selling group.  The equal and opposite relief returns the benefit to the buying group.

Currently, a group can retain the benefit of capital allowances claimed by a lessor company that it intends to sell, if the lessor company is first turned into an intermediate lessor.  This involves a sale of its plant and machinery followed by a lease back under specific leasing arrangements. As a result, the company can retain the timing benefit in respect of the capital allowances as the legislation applies the charge to owned assets and not to leased assets.

How this affects you

This change will correct the above anomaly so that the charge, and matching relief, is calculated by reference to all plant and machinery where the lessor company has entitlement to capital allowances, not just by reference to plant and machinery owned by the lessor.

This measure will have effect where a lessor company is sold on or after 13 November 2008.

Principles based approach to financial products avoidance

Following a consultation document issued in December 2007, and the announcement in the 2008 Budget of a possible principles based legislation to counter financial products avoidance, a further consultation paper was published.  This paper includes draft legislation and invites comments by 11 February 2009.

How this affects you

If introduced this legislation would counter tax avoidance in certain areas without the need for continually introducing detailed legislation.

Leasing avoidance by film partnerships

Changes have been proposed to counter avoidance through the use of long funding leasing provisions to avoid the creation of an income stream in connection with leasing by film partnerships.

Partnerships and LLPs have been created to produce a film and then lease the completed film to distribution companies in return for a rental stream. By structuring the lease to fall within the long funding lease provisions, it was possible to convert what would otherwise be taxable rental income into non-taxable income.

The measure will have effect for:

• Long funding leases of films entered into on and after 13 November 2008.
• Rents payable under long funding leases entered into before that date, but only to the extent that they are payable after (and refer to periods after) that date.

How this affects you

The change will ensure that use of the long funding lease provisions do not apply to this type of lease, and that the rental income remains taxable. As a result, the production and leasing of films by a film partnership will create a deferral rather than an absolute saving in income tax liabilities for the partners.

Disclosure of tax avoidance schemes – reporting scheme reference numbers to HMRC

Since 2004, advisers involved with the creation and/or promotion of certain tax avoidance schemes (the promoter) have been obliged to disclose full information in connection with these schemes to HMRC.

On receipt of the disclosure, HMRC has issued a scheme reference number (SRN) to the promoter. The promoter is required to pass the SRN on to clients who have implemented the scheme.

The main change will ensure that the SRN is reported in the tax return, for some taxpayers, earlier than at present.

The second change is that the user of the tax avoidance scheme must now report the SRN on a form AAG4 rather than on a tax return in the following circumstances:

• where the user is an individual who makes a freestanding claim for loss relief which is affected by the use of the scheme.
• where there are insufficient boxes on the return for the user to report all of the SRNs required to be reported.

The changes will have effect for tax return periods beginning on or after 1 April 2009.

Currently, a user of the tax avoidance scheme must normally first report a SRN in the tax return for the year, or accounting period in which the SRN
is received.

How this affects you

The main change will mean the SRN is now first reported in the tax return for the year or accounting period in which the scheme is implemented. There will be no change to the requirement to report a SRN for each subsequent year until the expected tax advantage ceases to apply.