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27 November 2006
Categories: News
Lessor companies; Film tax relief

Lessor companies

HMRC announced on 22 November that legislation will be introduced in the next Finance Bill to prevent companies from undermining the intended effect of FA 2006, Sch 10 (sale of lessor companies etc).
Schedule 10 imposes 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 paid tax on subsequent profits. Schemes that mitigate the effect of Sch 10 have been notified to HMRC under the disclosure rules.
The avoidance schemes use 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 Sch 10 charge.
The proposed legislation amends TA 1988, s 343 and FA 2006, Sch 10 as follows.

Section 343
The new rules will prevent the operation of s 343(2) where:

  • there is a transfer of a trade or part of a trade to which s 343 applies, and
  • either the predecessor or successor company is carrying on a business of leasing plant or machinery as defined for the purposes of FA 2006, Sch 10, unless
  • the predecessor and successor companies share the same principal company for the purposes of Sch 10 on the day that the trade or part of a trade is transferred.

The effect of the new rules will be to impose a further ownership requirement for lessor companies transferring plant or machinery assets along with a trade. These changes will have no effect on the vast majority of transfers of plant or machinery which take place within groups of companies. However, HMRC recognise that one consequence of the change will be to prevent s 343(2) applying to transfers of plant or machinery where companies are associated but not grouped and welcome comments from interested parties.

Schedule 10
Where a company is a lessor of plant or machinery, the company will be required to consider the presentation of the leased asset in isolation. Where the result of this is that the value of the asset would be greater than that shown in the accounts, the company will be required to substitute the higher value for the purposes of Sch 10.
A further rule will build on the anti-avoidance provisions in Sch 10 para 38. Where a question arises about the application of Sch 10, and a decrease or increase in the amount shown on the balance sheet in respect of plant or machinery arises as a consequence directly or indirectly of an arrangement, and the main purpose or one of the main purposes of those arrangements is to secure a tax advantage in terms of the application of Sch 10; the amount for the purposes of Sch 10 will be calculated ignoring the decrease or increase.
This rule will apply to attempts to increase or decrease the level of the income amount and will have the effect of making a corresponding adjustment to the expense amount. It will affect all companies carrying on a leasing business whether alone or in partnership.
Minor changes to paras 7(3)(b) and 17(2)(b) will ensure that all plant or machinery transferred to a company from associated companies on the relevant day is taken into consideration when establishing whether a company is carrying on a trade of leasing plant or machinery and in calculating the PM figure (as explained in Sch 10, para 17) for the purposes of the Schedule. The changes ensure that a transfer on the relevant day of assets into and out of an associated company before transfer to the company under consideration do not affect the operation of the Schedule. These changes have effect for the application of Sch 10 on or after 22 November.
The changes to s 343 will apply to transfers on or after 22 November. They will not be dependent on there being a qualifying change of ownership for the purposes of Sch 10. The amendments to Sch 10 will have effect in relation to:

  • changes of ownership occurring on or after 22 November; and
  • qualifying changes in a company's interest in a business which occur on or after 22 November.

For all other purposes the amendments made to Sch 10 will have effect from 22 November for the purpose of deciding whether a company carries on a business of leasing plant or machinery, whether alone or in partnership.
Draft clauses will be published at the pre-Budget report stage. Comments relating to this should be addressed to: Jo Brindley, HMRC, CT and VAT Products and Processes Group, Mailstation A, 3rd floor, 100 Parliament Street, London SW1A 2BQ, tel: 020 7147 2571, e-mail: jo.brindley@hmrc.gsi.gov.uk.
This announcement effectively tidies up the avoidance legislation announced in the pre-Budget report in December 2005, says Ernst & Young's Kevin Paterson. However, he adds that it would have been 'more informative' had HMRC published the draft legislation at the same time as making the announcement, so that those affected had complete details of the amendments.
www.hmrc.gov.uk


Lights, camera, action

The European Commission has approved the new film tax relief, subject to modifications to the definition of a British film (the so called cultural test in Schedule 1 of Films Act 1985). To give the relief on the basis of the present cultural test would therefore be to give illegal state aid and the Commission could require that any such aid given be recovered from the recipient.
Implementation of the new film tax rules in FA 2006, ss 31 to 53 including the new film tax relief (and phasing out of the previous relief at F(No 2)A 1992, s 42) will therefore not take place until the new cultural test has been approved by Parliament and is in force. This is expected to be 1 January 2007.
The new films rules, including film tax relief, will apply to all films commencing principal photography on or after 1 January 2007. Such films will be entitled to the new film tax relief if they satisfy the new cultural test and meet the other relevant conditions.
Films which commenced principal photography before 1 January 2007 and are complete by that date will not be covered by the new rules, and not entitled to film tax relief. They will instead be able to claim relief under F(No2)A 1992, s 42 provided they satisfy the relevant conditions.
There will be transitional rules covering films which commenced principal photography before 1 January 2007 and are still uncompleted then. Such films if they are qualifying co-productions, will be within the new rules and, provided that they meet the other relevant conditions, will be able to benefit from film tax relief. If they are not qualifying co-productions:

  • they will be within the new rules, provided they satisfy the new cultural test and (if they meet the other relevant conditions) will then be able to benefit from film tax relief; or
  • they will continue to be within F(No 2)A 1992, s 42 if they do not satisfy the new cultural test, provided, again, they meet the relevant conditions for that section.

These transitional rules will be contained in an order to be made under FA 2006, s 52. A draft order will be published shortly. With regard to television films, the transitional rules above mean that, like cinema films, television (and other not-for-cinema) productions which are completed before the end of 2006 are not within the new rules, instead they will be covered by F(No 2)A 1992, s 40A and 40B. Since the cultural test is not relevant to these productions, the transitional rules will, for simplicity, further exclude all not-for-cinema productions that remain uncompleted at 31 December from the new FA 2006 rules. So only television productions commencing principal photography on or after 1 January 2007 will be within the FA 2006 regime.
Welcoming the granting of EU approval, David Oliver, director of tax at Tenon, says that the 'transitional arrangements' seem flexible and he looks forward to them being approved by Parliament. He says that the relief is a very positive measure for the UK film industry.
www.hmrc.go.uk

 

Address change

The address to which employers should send the form FBI2 - Authorising your agent to use PAYE Online for Employers has changed and is now: HMRC, CAA (Central Agent Authorisation) Team, Longbenton, Newcastle upon Tyne, NE98 1ZZ.


 

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