403 Restriction on use of capital allowances for certain leased assets

Summary

This section ring-fences the leasing of machinery or plant so that, where it is carried on in conjunction with other activities (for example, a banking business), capital allowances on leased machinery or plant can be set off only against leasing income and not against any other income/gains. Where leasing is carried on by a company in a group of companies capital allowances on leased machinery or plant are not allowed to create losses for the purposes of group relief. However, where a business consists primarily of leasing the leasing ring fence is eased to provide a wider range of income against which leasing capital allowances and losses can be offset.

The restrictions do not apply in the case of—

• machinery or plant leased for use by the lessee for the purposes of manufacturing activities (this exception, however, does not apply in the case of a qualifying shipping trade – see section 407(6)) or in exempted trading operations at Shannon Airport, and
• leased films the making of which was assisted by the Irish Film Board.

The restrictions are effective from 25 January, 1984 but do not affect the set-off of expenditure incurred on machinery or plant under a leasing contract entered into before that day or during a grace period of approximately one month after that day. The section also contains an ancillary provision which eliminates a tax avoidance device, based on isolated leasing transactions, whereby individuals or companies sheltered non-leasing income from tax.

Details

Definitions and construction

(1) “chargeable period or its basis period” has the same meaning as in section 321(2), that is, the period (accounting period for corporation tax and basis period for income tax) by reference to which capital allowances are granted. Any such period which ends on or after 25 January, 1984 may be subject to the restrictions imposed by this section.

“lease adjacent activities” refers to sources of income or profits of corporate lessors (other than lease rental income) that excess specified capital allowances may be offset against (listed in clauses (II) to (V) of paragraph (d)(ii))

“the specified capital allowances” identifies the capital allowances which are subject to the restrictions provided for in this section. The allowances affected are, broadly, capital allowances in respect of machinery or plant provided for leasing on or after 25 January, 1984.

“trade of leasing” identifies the leasing activities which may be affected by the section; these are—

• any trade which consists wholly of the leasing of machinery or plant, or
• where a trade includes such leasing, the leasing part of the trade, which is treated as a separate trade by virtue of subsection (2).

Leasing includes—

• the letting or charter of ships or aircraft (except the chartering of ships in the course of a trade of operating ships), and
• letting machinery or plant on hire.

The broad interpretation of leasing is designed to ensure (where tax case law might not so rule) that all of the activities that would be carried on by a person whose only business is leasing and hiring of machinery or plant are included in that person’s trade of leasing.

This broad interpretation of leasing is modified with respect to the letting on charter of a ship by a company in the course of a trade of operating ships. Without this modification, in the case of a genuine trade of operating ships, certain kinds of chartering which are in fact part of a trade or are genuinely ancillary to the trade would be removed from the ambit of the trade for capital allowances purposes.

In such cases there is no question of denying the normal offset of capital allowances to such a trade in respect of ships let on spot or voyage charter or on time charter. These are in fact normal features of a ship operator’s trade. Bare-boat charter would also be so treated where it is ancillary to such a trade.

Accordingly, in the case of a company carrying on a trade of operating ships, any chartering of ships by the company which under the normal rules relating to Case I of Schedule D would be treated as part of that trade (and not, for example, as a leasing activity chargeable under Case IV of Schedule D) are to continue to be so treated despite this section.

Leasing business of a company and leasing business group

(1)(d) The range of income against which specified capital allowances on leased machinery or plant can be offset in the case of a business that consists primarily of leasing of machinery or plant is expanded in the case of certain corporate lessors. Such lessors can offset allowances against the profits or their own leasing business or the leasing business profits of the leasing business group.

How a company is affected by these ringfence rules is identified by reference to their activities and/or the activities of their wider group.

(1)(d)(i) In order to avail of this broadened ringfence, the company’s activities must consist wholly or mainly of leasing. This means that more than half of the activities must be lease rental activities. This condition can be met by

• the company itself (Clause (I)),
• the company, all companies of which it is a 75% subsidiary and its 75% subsidiaries – where all companies are resident in the State (Clause (II)),
• the company, all companies of which it is a 75% subsidiary and its 75% subsidiaries – where all are resident in a territory for the purposes of a tax corresponding to corporation tax (Clause (III)), and

the members of its corporate tax group for group relief purposes (within the meaning of section 411(1)) (Clause (IV))

(1)(d)(ii) In addition, not less than 90 per cent of the activities of the company itself must consist of leasing activities or activities that are leasing adjacent as set out in clauses (II) to (V). That is, not less than 90 per cent of the company’s activities must consist of a combination of the following:

• the leasing of machinery or plant (Clause (I));
• the provision of finance and guarantees to fund the type of assets that are leased by the company (Clause (II));
• the provision of finance to an intermediary member of the leasing business group who carries on financing activities referred to in Clause (II) where:
• the Clause (II) activity is provided to a company carrying out lease rental activity within the meaning of Clause (I),
• the finance provided to the intermediary member by the company was sourced from an unconnected third party source, and
• the finance provided is repaid on disposal of the leased machinery or plant.
• the provision of leasing expertise in relation to the type of assets that are leased by the company (Clause (III));
• the disposal of machinery or plant acquired in the course of its leasing trade (Clause (IV));
• the disposal of the right to acquire machinery or plant (or an interest in same) similar to that leased by the leasing business group which was intended to be used by that group for lease rental purposes (Clause (IVA));
• the disposal of any part of an item machinery or plant by the company that was previously used by that company for lease rental purposes (i.e. parting out activities) (Clause (IVB));
• activities ancillary to those listed above Clause (V)).

(1)(d) Where the activities meet the above conditions, they will be regarded as part of the leasing business and profits of the leasing business shall refer to the profits arising form these activities. Income from leasing short life assets which has been computed by reference to accounting principles in accordance with section 80A does not form part of the leasing business.

(1)(e) A company forms a leasing business group with the companies who are (or could be) relevant to determining its status as a leasing business (i.e. the grouping in paragraph (d)(i) (in Clause (II), (III), or (IV)) that the company used to determine the scope and scale of its leasing business – a company may not form a leasing business group where the grouping does not wholly or mainly carry on the actual leasing of machinery of plant).

Treatment of leasing as separate trade

(2) Where leasing of machinery or plant is carried on as part of a trade by a company or an individual (that is, such leasing and other activities constitute a single trade), the leasing activities are to be treated for tax purposes as a separate trade and the profits arising from those activities are to be assessed separately. The purpose of this separation is to prevent the automatic set-off of capital allowances on leased assets against the general profits of the trade (including non-leasing profits) which would otherwise be available where such leasing forms a part of a wider business. The provision is particularly relevant to leasing activities which form part of the general trade of banks or similar financial institutions.

Where the income of a company which is otherwise wholly engaged in the carrying on of a trade of leasing includes small amounts of non-leasing income which are merely incidental to the carrying on of the leasing trade, it is not necessary to make any apportionments of profits or to make any restrictions of capital allowances under this section. In general, the purpose of the section is to prevent the avoidance of tax on significant amounts of non-leasing income by the use of tax-based financing. Inspectors need not enter into time-consuming restrictions or correspondence in relation to minor amounts of other income which may arise in the course of a genuine leasing trade.

Having, for the purpose of computing taxable profits or losses, isolated leasing and the associated capital allowances, it is then possible, as is provided for in subsections (3) and (4) to prevent the excess of capital allowances on leased assets over leasing income being set off against other income.

The separate trade treatment is not, however, to imply a different commencement or cessation of the leasing trade from the commencement or cessation of the general trade of which it is a part.

Any necessary apportionments of the receipts and expenses of a trade that includes leasing activities can be made for the purpose of isolating the profits attributable to leasing.

For example, where leasing is carried on as part of a banking business, it will be necessary to apportion expenses between the gross income from leasing and the gross income from the rest of the banking business to arrive at the net income in each case. Thus, a portion of the overheads, funding costs, etc of the whole business (including leasing) will be identified as attributable to the leasing activity and these will be deducted from the lease rentals received to arrive at the net leasing income. The “specified capital allowances” will be allowed to be set off only against that leasing income.

(2A)Lease adjacent trading activities may be included as part of the trade of leasing in scenarios where the leasing and lease adjacent activities would have formed a single trade, but for the existence of subsection (2). This provision intends to prevent artificial demarcations arising within in a single trading entity. For example, a trading leasing company which earns both lease rental income and service fee income, associated with the same leasing business in the course of its trade, will be treated as having a single trade.

Ring-fencing of non-corporate traders

(3)(a) A loss for tax purposes sustained in a trade of leasing by a non-corporate trader cannot, to the extent that it is attributable to specified capital allowances, be set off against any profits/gains other than profits/gains from the trade of leasing. In effect, a ring-fence is constructed for tax purposes around the leasing trade and the specified capital allowances are to be confined within that ring-fence.

Under sections 381 and 382 capital allowances for a year of assessment, where they exceed the profits/gains of the trade against which they are claimed, may be treated as trading losses and relieved against any profits/gains of the year of assessment. Thus, surplus capital allowances of a trade of leasing could, in effect, be set off (apart from this section) against any other profits/gains of the year for which the allowances are due.

The set-off of surplus capital allowances is not available in the case of specified capital allowances. This is achieved by providing that a loss sustained in a trade of leasing, in so far as it is attributable to such specified capital allowances, is for the purposes of subsections (1) and (3)(b) of section 381 treated as reducing profits/gains of the trade of leasing only. Under section 381(1) the loss would, but for this subsection, be available against any income.

(3)(b)(i) A non-corporate trader carrying on a leasing trade may be able to avail of specified capital allowances and also of other capital allowances (for example, on leasing machinery which is grant-aided or which was provided for leasing before 25 January, 1984) in the year of assessment or he/she may have incurred an actual trading loss (because his/her expenses exceed his/her leasing income) in the year of assessment. In such a case maximum advantage can be taken of the capital allowances other than the specified allowances, or of the actual trading loss, in computing the amount of a loss to be relieved under section 381.

Under section 393 capital allowances must, before being used to create a loss, be used to cover a balancing charge. In such a case, only the amount of capital allowances in excess of such a balancing charge can be used for the purposes of a loss relief claim under section 381.

Any specified capital allowances in respect of the trade of leasing are to be treated as covering any such balancing charge in respect of that trade so that the maximum amount of any capital allowances other than the specified allowances can be used for a loss relief claim against non-leasing income. Thus, the limitation imposed by the balancing charge will be attributed primarily to the allowances (the specified capital allowances) which, because of this section, cannot be treated as available for relief against income other than non-leasing income.

(3)(b)(ii) A degree of flexibility is provided for with regard to the order in which—

• actual losses incurred in a trade of leasing (that is, an excess of expenses over lease rentals),
• specified capital allowances, and
• other capital allowances,

may be relieved against leasing income and non-leasing income under sections 381 and 392.

Section 392(2) provides that where an actual trading loss, together with capital allowances, is the subject of a loss relief claim under section 381 and the aggregate loss (that is, including the capital allowances) cannot be fully relieved, then the relief is to be treated as being given to the maximum extent possible in respect of the actual trading loss before being given in respect of the capital allowances. Because of the restrictions imposed on the extent to which specified capital allowances of a trade of leasing can be used for the purpose of loss relief, the priority established by section 392(2) could be unduly restrictive. Thus, it is provided that a claimant for loss relief under section 381 may specify the extent to which the relief is to be attributed to the loss (if any) actually sustained in the trade of leasing, the specified capital allowances or any other capital allowances.

Ring-fencing of corporate traders

(4)(a) The ringfence for corporate traders affects “relevant leasing losses”. Relevant leasing losses are those attributable to specified capital allowances arising in the course of a trade.

(4)(b)The “the relevant amount of the loss” refers to the amount of losses that are subject to the ringfence restriction.

The amount may be the full amount of the loss in circumstances where:

• there is no actual trading loss (before capital allowances) and
• there are no capital allowances other than specified capital allowances.

This means that, (some part of) the specified capital allowances has been effectively set off against an actual trading profit to create the loss (in such a case the tax loss has been created entirely by treating specified capital allowances as trading expenses by virtue of section 307).

In other circumstances, however, an amount less than the whole of the tax loss will be restricted. Where:

• no capital allowances other than the specified capital allowances are taken into account in arriving at the tax loss, and
• there is also an actual trading loss and the amount of the tax loss is greater than the total amount of the specified capital allowances,

then the restrictions will apply only to the total amount of the specified capital allowances.

Where the tax loss does not exceed the amount of the capital allowances which are not to be restricted (that is, capital allowances other than the specified capital allowances) no restriction is to be made.

Utilisation of relevant amount of restricted losses

(4)(c) Where a company incurs a ‘relevant leasing loss’ the ‘relevant amount of the loss’ shall only be available for relief under—

• section 396A (relief for relevant trading losses) insofar as they can be used to reduce the income of the company’s leasing business
• section 396B (relief for certain trading losses on a value basis) insofar as they can be used to reduce the corporation tax chargeable on the profits of the company’s leasing business
• section 420A (group relief: relevant losses and charges) insofar as they provide group relief for either:
• trading lease rental income, or
• trading income of the leasing business of a member of the company’s leasing business group.

section 420B (group relief: relief for certain trading losses on a value basis) insofar as they can provide group relief to reduce the corporation tax chargeable on the profits of the leasing business of a member of the company’s leasing business group.

Ring-fencing of non-trading leasing income

(5) Restrictions are imposed on the set-off of capital allowances on leased machinery or plant which, though the subject of a lease arrangement, is not leased in the course of a trade of leasing. For example, an individual or a company can purchase an item of machinery or plant and lease it to another person. The rentals received would be subject to tax under Case IV of Schedule D and the lessor would be entitled to the usual capital allowances against the rentals.

This provision ensures that capital allowances on machinery or plant purchased on or after 25 January 1984 (or 1 March 1984 where the subsection (6)(b) applies) provided for leasing, otherwise than in the course of a trade of leasing, are available for set-off only against the rentals received from the lease and not against any other income.

Where a corporate lessor has specified capital allowances arising from non-trading leasing activities, these allowances may be offset against leasing business profits. Such nontrading allowances are available for—

• relief against other leasing business profits in that company, and
• group relief against:
• lease rental profits, or
• the profits of the leasing business of a member of the company’s leasing business group.

Reporting obligations

(11) Companies affected by the restrictions in subsections (4) and/or (5) will be required to provide the following information in their annual corporation tax return:

• the specified capital allowances claimed in a period, including:
• the amounts arising, whether from a trade or otherwise, and
• any balancing events relating to specified allowances that have arisen in that period,
• relevant leasing losses carried forward from a previous period under section 396(1)
• relevant leasing loss claims under sections 396(1), 396A or 396B made in the period
• relevant leasing loss surrenders under sections 420A and 420B - including details of who the losses were surrendered to and on what basis the surrender qualified for relief,
• specified capital allowance claims under section 308(4),
• specified capital allowance surrenders under section 420(4) - including details of
• who the losses were surrendered to and
• the basis on which the surrender qualified for relief, and
• chargeable gains arising on the disposal of leased machinery and plant assets and details of any appropriations into trading stock.

Relevant Date: Finance Act 2024