Revenue Note for Guidance

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Revenue Note for Guidance

80A Taxation of certain short-term leases plant and machinery

Summary

This section provides an alternative taxing mechanism for lessors of certain short-term assets. Under existing rules, income of the lessor is calculated by treating gross lease payments as income and allowing capital allowances on the asset. Where the lease payments are received over say, 3 years but capital allowances are given over 8 years a timing mismatch occurs.

In the case of a finance lease, this section resolves this mismatch by allowing a lessor company to claim all such income computed for tax purposes under accounting rules rather than under existing tax rules. This will result in the “interest element” of lease payments being taxed but no capital allowances being available. It will not change the amount of tax paid but will allow a more even spread of the tax over the lease period.

In the case of an operating lease, the section allows a lessor company to elect to claim accounting depreciation in place of capital allowances. This treatment applies, in respect of accounting periods (“specified periods”) commencing on or after 1 January 2010 and ending on or before 31 December 2014 only where there has been an increase in the total value of short life assets leased on an operating lease by a lessor group of companies and held by the group at the end of the accounting period preceding the accounting period for which the depreciation is first claimed.

For accounting periods (“specified periods”) ending on or after January 2015, this section allows a lessor company to claim accounting treatment in respect of an operating lease. The amount of wear and tear allowance claimed is to be calculated by reference to the amounts of depreciation/impairment which has been charged, in the accounting period, to the Profit and Loss account of the lessor company in accordance with generally accepted accounting principles.

A claim may be made by the return date for an accounting period. Where such a claim is made, relevant leasing income on all assets purchased from the start of that accounting period will be subject to the rules.

The section applies, in respect of finance leases, for accounting periods ending on or after 4 February 2004 and in respect of operating leases, for accounting periods commencing on or after 1 January 2010.

Details

Definitions

(1)asset” means machinery or plant.

fair value” is essentially the cost price of the asset on an arm’s length basis at the inception of a lease.

group limit” is defined by the formula-

A + (B × (C – D) /C)

where-

A is the total value of capital allowances claimed by all group companies for the threshold period,

B is the total amount of depreciation charged to the profit and loss account for all group companies for the specified period,

C is the cost of “specified assets” owned by all group companies at the end of the specified period, and

D is the lesser of the cost of “specified assets” owned by all group companies at the end of the threshold period or C.

The purpose of the formula is to set a limit on the value of the allowances to be claimed under this section in respect of plant and machinery let under operating leases.

inception of the lease” is the earlier of the date on which the leased asset is first brought into use or the date from which the first lease payment accrue.

lease payments” are the payments made under a lease and includes any payment made at or after the end of the lease period where the payment is guaranteed by the lessee or a person connected with the lessee. If the payment is guaranteed by a third party who is not connected with the lessee, the payment is not to be regarded as a lease payment unless the guarantee is part of an arrangement between the lessee and any other person.

normal accounting practice” means the accounting practice for the preparation of accounts for companies incorporated in the State.

predictable useful life” is the useful life of the asset as estimated at the inception of the lease on the assumption that there will be normal usage of the asset.

profit and loss account” has the meaning assigned to it by generally accepted accounting standards and includes an income and expenditure account prepared under International Accounting Standards.

relevant period” is the period beginning at the inception of the lease and ending when the lessor has recovered 90 per cent of the investment in the asset.

relevant short-term asset” means an asset the predictable useful life of which does not exceed 8 years and the expenditure on which is incurred during an accounting period.

relevant short-term lease” means the lease of an asset the predictable useful life of which does not exceed 8 years, the expenditure on which is incurred during an accounting period and the relevant period of the asset does not exceed 8 years.

specified assets” means short term assets which have been leased for a period which does not exceed 8 years on a lease other than a finance lease.

specified period”:

  • (a) in the case of companies which are members of a group where all the companies in that group have accounting periods that coincide, is the period of 12 months throughout which one or more group companies carries on a trade of leasing “specified assets” and ending at the end of the first accounting period which commences on or after1 January 2010, or
  • (b) in the case of companies which are members of a group where the companies in the group do not have coinciding accounting periods, is the period which is specified in a notice in writing made jointly by all of the companies in the group – that is a period of 12 months throughout which one or more group companies carried on a trade of leasing “specified assets” and ending at the end of the first accounting period of a company which is a member of the group, which accounting period commences on or after1 January 2010.

Each subsequent period of 12 months commencing immediately after the end of the preceding “specified period” is also a “specified period”. Effectively therefore a “specified period” is an accounting period of 12 months commencing on or after 1 January 2010.

“threshold amount” is defined as the aggregate capital allowances granted to all group companies in respect of expenditure on specified assets for the “threshold period”.

“threshold period” is defined as an accounting period of one year ending on a date immediately preceding the date on which the first specified period commencing on or after 1 January 2010 begins.

Finance Leases

(2) Subsection (2) applies to assets leased under a finance lease. A claim made under this subsection enables a lessor company to claim, at the time by which a tax return is due for an accounting period, to have all income from short-term assets leased under a finance lease, from the start of that accounting period, and all future such income, computed for tax purposes under accounting rules rather than under existing tax rules.

Operating leases

For accounting periods (“specified periods”) commencing on or after 1 January 2010 and ending on or before 31 December 2014 the following applies to the wear and tear allowance claimed on operating leases under this Section.

(2A)(a) Subsection (2A) apples to assets leased under an operating lease. Paragraph (a) provides that a reference to an amount of wear and tear allowance in section 284 (which is the section dealing with the granting of a wear and tear allowance for plant and machinery) shall be construed as if the references in that section to an amount of wear and tear allowance, is a reference to the amounts of depreciation/impairment which has been charged, in the accounting period, to the Profit and Loss account in accordance with generally accepted accounting principles. This paragraph is made subject to paragraph (c).

(2A)(b) Paragraph (b) provides that the income from “specified assets” will not be treated as income from a trade of leasing for the purposes of section 403 (this effectively ensures that profits from the leasing of short life assets cannot be sheltered by losses from the leasing of long life assets).

(2A)(c) Paragraph (c) sets out the formula for allocating the group limit between the lessor companies in the group. It provides that the amount of the “wear and tear” allowance to be made to the company for any accounting period cannot exceed an amount to be calculated by the following formula:

E × F/G

Where-

E is the group limit,

F is the cost of “specified assets” owned by the company at the end of the accounting period, and

G is the cost of “specified assets” owned by all group companies at the end of the accounting period.

The purpose of the formula is to give the claimant lessor company a share in the group limit. The group limit represents the increase in the group’s portfolio of assets compared to the previous year. The extent to which an individual company can claim this treatment in respect of their asset portfolio derives from the proportion of the groups assets held by the individual company.

Example

A group increased its portfolio of assets by €20M from €100M to €120M and Company RST, a member of the group, holds €60M of the group’s total assets.

Formula: E × F/G

E in this case is €20M

F in this case is €60M

G in this case is €120M

€20M × (60M/120M) = €10M

Company RST can only claim accounting depreciation in respect of €10M worth of the leased assets.

(2A)(d) The amount of depreciation charge which has not been used (in the example €50m), can be carried forward to the following accounting period.

(2A)(e) The amount of the allowances to be attributed to each “specified asset” is to be calculated on a pro rata basis to the cost of the asset and the total cost of all “specified assets” owned by the company and in use for the purposes of the trade at the end of that accounting period.

Using the example above:

Asset Cost €m

Proportion of Total %

Amount of Wear and Tear attributable to each asset

5

8.33

833,000

10

16.67

1,667,000

20

33.33

3,333,000

18

30.00

3,000,000

17

11.67

1,167,000

60

100.00

10,000,000

(2A)(f) Where no accounting period coincides with the “threshold period”, the amount of allowances to be granted should be calculated on a just and reasonable basis.

(2A)(g) There is no group limit in the case of new companies so in such cases, the threshold amount is deemed to be nil.

(2A)(h) For accounting periods (“specified periods”) ending on or after January 2015 the amount of wear and tear allowance claimed on operating leases under this section is to be calculated by reference to the amounts of depreciation/impairment which has been charged, in the accounting period, to the Profit and Loss account in accordance with generally accepted accounting principles.

Membership of a Group of Companies

(2B)(a) Companies will be regarded as members of a group if one is a 51 per cent subsidiary of the other or both are 51 per cent subsidiaries of a third company. In determining whether this is the case, ownership of shares by a company dealing in the shares (i.e. where a profit on sale of the shares would be treated for tax purposes as a trading receipt) is to be ignored (under clause (i)), as is indirect ownership of shares which are directly owned by a company dealing in the shares (under clause (ii)).

(2B)(b) In addition, any holding must be a “real holding”. Sections 412 to 418 are applied for the purposes of this section. Those sections require that in order to be regarded as having a certain percentage holding in a company, the person concerned must be entitled to not only that percentage of the shares, but also of any profits of the company for distribution and any share of the company’s assets in the event of its winding up. Sections 412 to 418 are constructed around a 75 per cent holding level. They are adapted for this section so as to apply to a 51 per cent holding level. Section 411(1)(c) is disapplied for the purposes of this section to ensure that its scope is not limited to companies resident in EEA Member States.

(2B)(c) A company and all its 51 per cent subsidiaries are to be regarded as forming a group. However, if within a 51 per cent group there are 51 per cent subgroups, the group for the purpose of this section will be the bigger group. A company which is not a member of a group can be regarded as a group consisting only of itself. This ensures that the allowance is available to such a company if it meets the conditions of the section.

(2B)(d) A group in the threshold period will be designated as the same group as the group in the specified period even though there may not be a perfect match of companies. The key issue is whether the group is under the control of any person or group of persons at both times.

Time limit for claim

(3) A claim for relief must be made by the time at which a tax return is due for an accounting period.

Relevant Date: Finance Act 2020