Revenue Note for Guidance

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Revenue Note for Guidance

425 Leasing contracts: effect on claims for losses of company reconstructions


This section is designed to prevent a possible abuse of capital allowances in respect of machinery and plant purchased and then leased. The allowance with which the section is concerned are the initial allowance (section 283) and accelerated capital allowances (section 285).


Company A (possibly a bank) buys an asset for €1m and leases it to company X, a loss-maker. An accelerated capital allowance of €1m is then claimed by company A against the tax on its other profits (if it can establish that the rental is trading income). In the following accounting period the asset subject to the leasing contract is transferred to company B, a subsidiary of company A set up for the purpose, without a balancing charge falling due in respect of the sale of the asset because of the relationship between the 2 companies. Under prior arrangement company X purchases from company A the shares of company B at a price which reflects the benefit of the tax relief given to company A in respect of the asset. In this way company X through its group relationship with company B acquires ownership of the asset and a substantial share of the cash value of the tax relief obtained by company A in respect of the asset. In addition, company B can obtain group relief in respect of company X’s losses.

The section deals with an abuse such as is set out in the example by providing that a loss (created by capital allowances) in respect of the leasing contract can be allowed only by carry-forward against subsequent profits (if any) arising under the contract.


(1) Where a company buys plant and machinery which it lets to another person by a leasing contract entered into after 27 November, 1975 and the company could claim relief in respect of a loss incurred in the leasing contract, and if in the accounting period for which an initial or free depreciation allowance in respect of plant and machinery was given to the company the arrangements specified in paragraph (c) existed, then the company is entitled to claim relief on the capital allowances against the leasing contract profits only.

(2) The arrangements (which may be of any kind, whether in writing or not) specified are those which provide for a successor company to carry on the trade or any part of the trade of the company which consists of or includes the obligations of the (lessor) company under the leasing contract.

A successor is —

  • one within the meaning of successor as used in section 400 (company reconstruction without ownership change), or
  • where the 2 companies are connected with one another (see section 10).

(3) Profits or losses arising from the leasing are to be computed on the basis that a separate trade commenced at the commencement of the letting.

(4) In determining whether the lessor company is entitled to claim relief under section 396(1) or (2) for a loss arising from a leasing contract, the loss is to be treated as incurred in a separate trade.

Relevant Date: Finance Act 2021