TaxCorporate TaxGovernment lands early blow to leasing avoidance schemes

Government lands early blow to leasing avoidance schemes

Pre-Budget report to introduce rules to block two schemes that avoid tax through the sale of leasing companies

The government has struck its first anti-avoidance blow ahead of next week’s
pre-Budget report by shutting down two schemes that avoided tax through the sale
of leasing companies.

HM Revenue & Customs said the pre-Budget report would introduce rules to
block the schemes, which had escaped chancellor Gordon Brown’s original attempts
to prevent avoidance in this area.

The sale of leasing companies has always been a hot area for avoidance
because of the way leases are structured. Advisers said companies leasing heavy
machinery, such as aircraft, helicopters and bulldozers, were being used as part
of the arrangements.

Leasing businesses usually claim capital allowances creating tax losses for
the first few years following a deal, which then moves into profit as the lease
progresses.

In order to take advantage of this, leasing companies would attract the
relief for the initial tax losses. The companies would then be purchased by
another group carrying losses in order to shelter profits.

The government clamped down on this practice in Schedule 10 of the Finance
Act 2006 by imposing a charge on leasing companies that benefited from tax
losses in the initial years of a lease and were then sold.

Since then two schemes had been designed to skirt the provisions of Schedule
10, but after they were brought to HMRC’s attention as part of the disclosure
regime government has moved to shut them down by introducing the new rules.

The two schemes reduced or eliminated the Schedule 10 charge by implementing
arrangements that changed the ownership of leased equipment with an accounting
value higher than its tax value.

‘There were a few clever people who managed to find a way around Schedule
10,’ said Chiltern tax director Bernard Sweet. ‘They would have put these
schemes through once or twice, but they have been picked up by the disclosure
regime.’

Advisers were unsure about the details of the rules, which will be announced
in the pre-Budget report and became effective from 22 November.

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