TaxPersonal Tax21 MARCH 2000 BUDGET-RENT FACTORING

21 MARCH 2000 BUDGET-RENT FACTORING

Legislation to clarify the tax rules for rent factoring schemes is to be introduced.

Summary of measures

Legislation to clarify the tax rules for rent factoring schemes is to be introduced.

This will ensure that in transactions under such schemes entered into from today payments for the sale of rents, and premiums for granting leases, will be taxed as income receipts under Schedule A. The legislation will deter companies from using these schemes to avoid tax. The Inland Revenue’s view of the law as it applies to existing schemes is unchanged.

Further Details

1. Rent factoring schemes are used by large companies – typically retailers or property companies – seeking to raise finance. In substance the schemes are equivalent to bank loans, but they aim to get a more advantageous tax result for the companies engaging in them.

2. The schemes can have different mechanisms but generally follow the same fundamental approach. In exchange for a lump sum, in essence a loan, a company diverts future rental income in respect of property in the UK to a financier, usually a bank. The rents repay the loan at interest. By exchanging future income for a lump sum in this way the borrower aims to get tax relief that would otherwise not be available for loan repayments.

3. Legislation will be introduced to ensure that the lump sum obtained will be taxed as an income receipt under Schedule A. It will apply where either the borrower’s accounts, or the consolidated accounts of the borrower’s group, should treat the arrangements as in substance a loan rather than as a disposal of property interests.

4. The Inland Revenue believes that some such lump sum receipts may already fall within Schedule A under existing law. This legislation puts the position beyond doubt for the future. It does not affect the Inland Revenue’s view of how existing schemes should be taxed.

5. The new provisions will be drawn up so as not to affect the taxation of genuine investment in property. A typical rent factoring scheme lasts up to 10 years or so, but is structured in a way that attempts to avoid a charge to tax under Schedule A. The legislation will therefore not apply to arrangements:
– with an effective economic life of more than 15 years;
– where any lease granted to the lender is regarded for tax purposes as having a life of no more than 15 years; or
– where the economic life of the arrangements is not significantly different from the tax life of the lease.

6. Neither will the legislation be aimed at capital allowances based finance leasing. The new provisions will not apply when the pricing of the arrangements is significantly influenced by the anticipated availability to the lender of capital allowances on plant or machinery or a building or structure attached to the land being leased.

7. The new rules will not apply if the receipt is already chargeable to corporation tax as trading income under Case I of Schedule D. And where a premium is chargeable under this new provision, it will not also be chargeable under section 34 ICTA 1988.

8. The legislation will apply to transactions entered into on or after Budget day.

Background Notes

1. Schedule A is the normal charging provision for rents payable in respect of interests in property in the United Kingdom. In rent factoring schemes it is claimed that the effect of exchanging an entitlement to receive future rents for a lump sum from a financier means that the lump sum is only chargeable to tax, if at all, as a capital receipt. These changes counter this by ensuring that the lump sum is nonetheless taxable as though it was rent.

2. These proposals are expected to yield 20 million pounds in 2000-2001, 50 million pounds in 2001-2002 rising to 150 million pounds in a full year (2004-05).

This will ensure that in transactions under such schemes entered into from today payments for the sale of rents, and premiums for granting leases, will be taxed as income receipts under Schedule A. The legislation will deter companies from using these schemes to avoid tax. The Inland Revenue’s view of the law as it applies to existing schemes is unchanged.

Further Details

1. Rent factoring schemes are used by large companies – typically retailers or property companies – seeking to raise finance. In substance the schemes are equivalent to bank loans, but they aim to get a more advantageous tax result for the companies engaging in them.

2. The schemes can have different mechanisms but generally follow the same fundamental approach. In exchange for a lump sum, in essence a loan, a company diverts future rental income in respect of property in the UK to a financier, usually a bank. The rents repay the loan at interest. By exchanging future income for a lump sum in this way the borrower aims to get tax relief that would otherwise not be available for loan repayments.

3. Legislation will be introduced to ensure that the lump sum obtained will be taxed as an income receipt under Schedule A. It will apply where either the borrower’s accounts, or the consolidated accounts of the borrower’s group, should treat the arrangements as in substance a loan rather than as a disposal of property interests.

4. The Inland Revenue believes that some such lump sum receipts may already fall within Schedule A under existing law. This legislation puts the position beyond doubt for the future. It does not affect the Inland Revenue’s view of how existing schemes should be taxed.

5. The new provisions will be drawn up so as not to affect the taxation of genuine investment in property. A typical rent factoring scheme lasts up to 10 years or so, but is structured in a way that attempts to avoid a charge to tax under Schedule A. The legislation will therefore not apply to arrangements:
– with an effective economic life of more than 15 years;
– where any lease granted to the lender is regarded for tax purposes as having a life of no more than 15 years; or
– where the economic life of the arrangements is not significantly different from the tax life of the lease.

6. Neither will the legislation be aimed at capital allowances based finance leasing. The new provisions will not apply when the pricing of the arrangements is significantly influenced by the anticipated availability to the lender of capital allowances on plant or machinery or a building or structure attached to the land being leased.

7. The new rules will not apply if the receipt is already chargeable to corporation tax as trading income under Case I of Schedule D. And where a premium is chargeable under this new provision, it will not also be chargeable under section 34 ICTA 1988.

8. The legislation will apply to transactions entered into on or after Budget day.

Background Notes

1. Schedule A is the normal charging provision for rents payable in respect of interests in property in the United Kingdom. In rent factoring schemes it is claimed that the effect of exchanging an entitlement to receive future rents for a lump sum from a financier means that the lump sum is only chargeable to tax, if at all, as a capital receipt. These changes counter this by ensuring that the lump sum is nonetheless taxable as though it was rent.

2. These proposals are expected to yield 20 million pounds in 2000-2001, 50 million pounds in 2001-2002 rising to 150 million pounds in a full year (2004-05).

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