Could leasing exclusion be removed from full expensing rules?

To date it has not been possible to claim a first year allowance (FYA), such as super-deduction or full expensing relief, on the provision of plant and machinery for leasing. The Government is to hold discussions next year on how the rules might be extended to allow lessors to claim full expensing relief in certain cases. The consultation is to run from April to September 2024 on the extension of full expensing to lessors of plant and machinery.

The leasing consultation was announced in a short HM Treasury document published alongside the Autumn Statement where it was confirmed that full expensing relief for plant and machinery would be made permanent. (We note a separate consultation is to be held earlier in 2024 looking into general simplification of the plant and machinery allowances rules – we discuss this in a separate article)

There has been a long-standing block on FYA where assets are used for leasing (section 46 Capital Allowances Act 2001, General Exclusion 6). Attention became focused on this restriction when there was a return in April 2021 to more widespread FYA availability for non-leased assets.

Where the lessee is treated as the ‘tax owner’, they can already claim FYA if they meet the other conditions. Chief examples of this are: (i) the long funding lease rules; and (ii) the hire purchase rules. However, in other cases no one will be entitled to a FYA under the current system. The potential tax incentive would thus be ‘lost’ in the case of the expenditure involved.

The consultation will focus on whether a lessor who is ‘tax owner’ can claim full expensing relief. This would mean non-long funding leases which are not section 67 hire purchase contracts - situations where the lessor has to date been entitled to claim writing down allowances.

The Terms of Reference refer to a desire to “minimise risk from tax motivated leasing arrangements and minimise likelihood of error”. We can therefore expect that the consultation will consider issues such as whether it is acceptable for leases to overseas persons to give rise to tax benefits in a UK lessor without any UK industrial investment. In the past this concern was answered by the overseas leasing rules: it is thus a possibility that we may see a return to this system as a means of preventing perceived abuses. There may be a Targeted Anti Avoidance Rule (TAAR) designed to exclude tax motivated artificial transactions, as was done when the super-deduction was introduced. The likelihood of error, one would hope, could be dealt with by clear drafting and communication. In our view, it should not materially add to the existing level of complexity of the UK tax rules on leasing issues.

This will be a welcome move both for the lessors in question and for lessees who are able to share in the benefits of full expensing through rental pricing.

For further information please contact:

• Michael Everett
• Ian Stephenson