Spotting leasing issues on transactions
Some key tax points to be alert to where transactions involve leases of property or plant/machinery.
Some key tax points to be alert to where transactions involve leases of property or....
The UK tax rules on leasing are reputed to be the most complex tax provisions in the world (which might be thought a dubious honour…). Following the recent festive period and as transactions power ahead again Michael Everett, Head of Leasing Tax at KPMG UK, gives some insights on which of those rules may be relevant, based on transactions we commonly see in practice. The article covers both ongoing leasing structures which need critiquing on deals, and transaction types which themselves trigger specific leasing anti-avoidance provisions.
Points to consider include:
- Has the target entered into historic leasing transactions to raise finance or obtain tax benefits? If so, the correct current tax treatment may not be obvious. We still see leases which were entered into over 30 years ago and the tax legislation has changed multiple times over the life of the lease. Grandfathered provisions do not always remain in print in the ‘Yellow Books’, but they are still law;
- Is the transaction a sale and finance leaseback of land and property? If so, we need to consider the ‘Type 1 financing arrangement’ rules which treat the lease as a loan for tax purposes;
- Is the target a plant and machinery lessor and do they lease out vehicles or other types of plant? If so, the ‘sale of lessor’ rules bite if the book value exceeds the tax value. These rules can impact deal dynamics. The ‘sale of lessor’ charge is generally seen as a tax cost to be borne by the vendor, with the purchaser expected to pay for the value of the tax deduction which will arise as a result in the acquired business;
- ‘Capital allowances buying’ rules can be in point for a leasing company where it has an excess of tax value over book value. The effect is to ring fence an element of allowances in the business (so it should not apply if ‘sale of lessor’ rules do);
- Over the last couple of years IFRS16 has largely bedded down but we still see questions, for example, around the treatment of impairments and landlord contributions, in the hands of lessee companies; and
- At the more mechanistic end, some companies have issues applying the long funding lease rules. The first step is establishing if arrangements should be accounted for as a lease. There is then a series of tests to establish whether the lease term and rental profile point to the lessor or the lessee being entitled to capital allowances.
If you would like to discuss any of these points please speak to Michael or your usual KPMG UK contact.