HMRC Acts To Close Loophole Regarding Sale Of Lessor Companies

by Jason Gorringe, Tax-News.com, London

23 November 2006

The UK government announced on Wednesday that legislation will be introduced in the next Finance Bill to prevent companies from undermining the intended effect of Schedule 10 Finance Act 2006, which pertains to the sale of lessor companies.

Schedule 10 introduced targeted anti-avoidance legislation aimed at deterring the sale of a lessor company in circumstances that have the effect of turning a tax timing advantage into what may amount to a permanent loss of tax.

It did this by imposing a charge when a lessor company changes ownership, having enjoyed the benefits of the tax losses arising from the capital allowances available in the early years of a lease, but not yet having paid tax on subsequent profits.

However, HMRC explained on Wednesday that:

"Schemes that mitigate the effect of Schedule 10 have been notified to HMRC under the disclosure rules and the Government is taking action now to prevent their continued use."

According to the tax authority, the avoidance schemes in question utilised arrangements designed to transfer the ownership of leased plant or machinery with an accounting value higher than its tax written down value, in a way that is intended to reduce or eliminate the Schedule 10 charge.

The measures notified yesterday will apply only to companies, and will have immediate effect. Draft legislation, on which comment is invited, will be published in the Pre-Budget Report.

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