An outline of the potential tax legislation changes following IFRS 16 implementation.
The UK tax treatment of leased assets is complex, and it is heavily dependent on the accounting treatment. IFRS 16 will have a radical impact on lessees’ accounting. So you may already be wondering - what changes to tax legislation may be needed once IFRS 16 has been implemented?
For the time being the answer to this question will need to be somewhat speculative, even vague, but there is no need to apologise for this.
HMRC released their first discussion document in this area - “Lease Accounting Changes: Tax Response” - in August 2016. This publication discussed possible tax responses to IFRS 16. At that time HMRC was considering an option which essentially maintained status quo as well as other options which represented radical change, such as the removal of capital allowances for all leased plant and machinery. Motives
for more radical reforms may have included simplification but there may also have been a revenue-raising aspect given the valuable timing advantages arising to some taxpayers from the current capital allowances system.
The August 2016 document invited comments. Following this consultation period, the Government announced in the 2017 Spring Budget papers that they intended to maintain the current system of lease taxation. The other options for more radical reform which they had been considering therefore appear to have been shelved. This comes as a relief to many. But the Devil will be in the detail – there are literally hundreds of tax provisions requiring some form of adjustment to maintain the integrity of the tax system. And there will be difficult questions of judgment for HMRC in areas of anti-avoidance such as the Type 1 finance rules. These rules currently catch sale and finance leasebacks of land but not operating leasebacks and potentially they could apply more widely post IFRS 16.
More detail on these and other matters is expected to be unveiled in a further consultation document. This was due to be issued in Summer 2017. We now understand that, due to factors including the impact of the June election on HMRC/Treasury resources, the expected issue date for the consultation has been pushed back to the Autumn. Autumn is already in the air as we write so we suspect this will be more of an early Christmas present.
We understand that the consultation is likely to include the following points:
The timetable will be fairly tight and we hope quality does not suffer as a result. Draft legislation can be expected to be released for consultation around December 2017/January 2018. Final measures will then need to be included in Finance Bill 2018, ready for a commencement date of 1 January 2019, the date from which IFRS 16 will apply to most companies.
HMRC’s focus so far in their statements has been mostly on leased plant and machinery. Of course, IFRS 16 itself has no such limitations. We will have to see whether the HMRC proposals deal with leased land and other non-plant assets. If not, there may be a long-term future for section 53 FA 2011, a palliative measure which requires old GAAP to be maintained indefinitely (in parallel with IFRS 16 accounting) to drive tax return numbers. Section 53 FA 2011 will also be relevant for any brave early adopters of IFRS 16, given that the new tax rules will not be in place until 2019.
Companies should be reviewing their leases including off-balance sheet lease agreements to see how IFRS16 affects them. On tax, it is difficult to recommend anything specific until we have seen some more detail of the changes, including any grandfathering provisions.