The UK leasing rules were changed with effect from 1 April 2006 so that leasing to UK residents and non-residents could be undertaken on the same basis. However, for leases granted to non-UK residents prior to that date, special rules apply, which made such leasing almost impossible. It has been considered for many years that, where the lessee was based in the EU, such restrictions were in breach of the EU rules relating to the freedom to supply services, and therefore were inoperative.
HMRC have to date resisted this argument, but on 24 May 2007 they published a press release conceding the point, and saying that they have decided not to contest certain cases where the point has arisen.
Under the new practice, where assets are leased to residents of EEA (the EU states, plus Norway, Iceland and Lichtenstein) jurisdictions under leases entered into before 1 April 2006:
- if the relevant EEA jurisdiction gives the lessee a relief broadly equivalent to capital allowances, allowances will be available to the lessor in the UK, but at the 10% rate only
- where no equivalent relief is available to the lessee, the allowances will be available at the full 25% rate (subject to the general reduction to 20% from April 2008)
As a result of this change in practice, it may be possible for a lessor to claim additional allowances in cases where no allowances or restricted allowances have been claimed to date, where the lessee satisfies these requirements. Equally, where a 25% lease has been entered into with a UK resident, it may now be possible for that UK resident to transfer its rights under the lease to an EEA person which satisfies the requirements to obtain relief at 25%, or to cease UK residence and become resident an in EEA jurisdiction, so as to minimise its exposure to UK tax. In both cases, consideration would need to be given to the capital gains implications for the lessee.
Lessors based in EU jurisdictions which apply a similar test to restrict the availability of tax depreciation for assets leased to persons not resident in that jurisdiction might be able to use this decision by HMRC to put pressure on their tax authority to come to a similar view.
This publication is written as a general guide only. It is not intended to contain definitive legal advice which should be sought as appropriate in relation to a particular matter.