CA28400 - PMA: Anti-avoidance: Finance leases - outline and meaning of finance lease

CAA01/S219

There are special rules for plant and machinery acquired for leasing out under a finance lease.

First, the expenditure that qualifies for capital allowances may be time apportioned in the first year CA28450. This counters the use of finance leases to accelerate the benefit of capital allowances on the leased asset.

Second, where the asset has been sold and leased back under arrangements that remove the greater part of the risk that the lessee will not meet its obligations under the lease, no allowances are given to the lessor CA28600. This can happen for example when the lease is on defeased terms. Defeasance is a term used to describe arrangements where a third party takes over the lessee’s obligations to pay rentals in return for a lump sum payment, or guarantees rentals in return for a dedicated cash deposit that the lessee can only withdraw to pay them.

This second rule counters arrangements to transfer the benefit of unused allowances to a finance lessor.

Meaning of ‘finance lease’

A finance lease is an arrangement or arrangements that under Generally Accepted Accountancy Practice would fall to be treated as a finance lease or a loan in the accounts or consolidated accounts of the lessor or any person connected with the lessor.