HC Deb 07 July 1971 vol 820 cc1429-33
Mr. Higgins

I beg to move Amendment No. 51, in page 40, line 32, after 'is', insert 'first'.

I think that it would be for the convenience of the House if with this Amendment we took Amendments Nos. 53 and 54, if that is agreeable.

Clause 43 reforms the rules for giving capital allowances on leased machinery and plant, giving the allowances on each asset to the person, whether lessor or lessee, who actually incurs the expenditure on it, a result which has not always followed, as I explained in Committee, under the existing law. Examination of the Clause has, however, revealed a defect in the new scheme which the three Amendments are designed to cure.

Clause 43(2) provides for the case in which the expenditure is incurred by the lessee. The most common case of this is the long lease of a building with an obligation on the lessee to replace, as they wear out, various items of plant—for example, lifts, central heating boilers, and so on—installed in the building. Clause 43(2) gives the lessee the title to allowances on any item which he replaces by treating it as if it belonged to him so long as it is in use for the purposes of his trade. That is the crucial point. But in reality the replacement item does not belong to the lessee; it becomes the property of the lessor, to whom it has to be surrendered at the end of the lease.

The Clause as it stood recognised this by providing that, on determination of the lease, no disposal value was to be brought into account against the lessee. So far as it went, that was right, but at the end of the lease the lessor has acquired a possibly valuable piece of plant or machinery which, if he wishes, he can dispose of. Since he had not incurred the capital expenditure on the plant or machinery, there was nothing in the Clauses as they stood to require him to bring into account any disposal value if he disposes of it.

Amendment No. 54 remedies this situation by providing that, from the determination of the lease, the provisions about disposal value are to have effect as if the capital expenditure on the replacement had been incurred by the lessor, not the lessee. From that time anything which the lessor receives for the disposal of the plant or machinery will reduce the value of the "pool" on which the lessor's capital allowances are calculated; or, if he has no allowances, there will be a balancing charge on him. That is clearly right. The fact that the disposal value comes into the lessor's capital allowances computation is no more than the counterpart of the fact that it does not come into the lessee's.

By itself, Amendment No. 54 would have been inadequate if the lessor came within Clause 43(1); that is, if his letting does not constitute a trade for tax purposes. The lessor of a building on a repairing lease is likely to come within Clause 43(1). His income from the letting falls under Schedule A, not under Case I of Schedule D. As subsection (1) of Clause 43 was drafted, or as it is drafted now, the trade which, under the subsection, is deemed to exist for the purpose of capital allowances to the lessor was brought to an end on determination of the lease; whereas it is after that point of time that, in the circumstances which I have just mentioned, it may be right to bring disposal value into account against him. The two amendments to Clause 43(1) permit this by prolonging the duration of the deemed trade from the time of the first letting of an asset by the lessor to the time when it permanently ceases to be let by him.

I apologise for the length of that explanation, but it seemed right, as we were somewhat changing the situation which now exists, that I should spell it out. I hope that the House will agree to the Amendment.

Amendment agreed to.

8.15 p.m.

Mr. Higgins

I beg to move Amendment No. 52, in page 40, line 34, leave out from 'used' to end of line and insert 'for the purposes of a trade carried on by the lessee'.

Mr. Deputy Speaker (Sir Robert Grant-Ferris)

I understand that this is a paving Amendment and that it will be convenient to take with it Amendments Nos. 55, 56 and 57.

Mr. Higgins

I think that would be agreeable, Mr. Deputy Speaker. We shall in due course come to the other two Amendments which we discussed a few moments ago. It will be convenient to discuss those Amendments with Amendment No. 52 to Clause 43. It is effectively a paving Amendment. It prepares the way for Amendments Nos. 55, 56 and 57, which arise on a subsequent Clause. Therefore, I think that it would be for the convenience of the House if we discussed those three Amendments at the same time.

I must again apologise to the House for a rather lengthy explanation, but it will be as well to get the position on the record.

These four Amendments essentially deal with a single point. Clause 43, which deals with the capital allowances on leased machinery or plant, reverses, as I said in Committee, in favour of the taxpayer a decision of the courts on the interpretation of the existing law. It was decided in the case of Macsaga Investment Co. v. Lupton which went to the Court of Appeal in 1967, that capital allowances could not be given on leased machinery or plant unless either the lessor or the lessee was using the asset in the carrying on of a trade.

This has the absurd result that if the owner of an office block lets it partly to a trader and partly to a Government Department or local authority, the lessor cannot get full capital allowances on, for example, the lift system or something of that kind in the building, and the proportion of the allowances which he can get may vary as the tenancies in the building alter.

I think that the House will agree that that is not a satisfactory situation. The opening words of Clause 43(1) reverse this situation. As the Clause now stands, it goes too far. It would open the door to leasing transactions entered into simply to exploit the capital allowances system. Hon. Members on both sides of the House have expressed concern about such possible loopholes. I will give a simple example, though there are more sophisticated variants. We might have two individuals who each buy a car which they lease to each other for a purely nominal rent, each using his car for private purposes. Each claims capital allowances, under Clause 43, on the car that he owns, and, as these allowances will greatly exceed the rent he receives, each will have a tax loss available to be set against his other income.

We obviously need to remedy that position. The remedy is not to resile from the decision to give capital allowances where there is a genuine commercial transaction involving capital expenditure on plant and machinery between two parties neither of whom happens to be a trader. The root of the trouble is that, where the capital allowances exceed the rent, the resulting tax loss provides an incentive for artificial transactions.

The Amendments, which are necessarily a little complicated, ensure that where neither the lessor nor the lessee is trading, any surplus of the capital allowances over the rent received is not made available for set-off against other income. The surplus allowances can only be carried forward against the income from the letting of the asset in respect of which they have been given. This will be sufficient to meet the case of the genuine commercial letting and will avoid opening the door to exploitation.

There is one final point. Amendments Nos. 56 and 57 contain the substantive provisions. These are in Clause 45, which I mentioned, which governs the way in which allowances are given, including the set-off of surplus allowances against other income. The set-off is provided for by Section 71(1) and Section 74(4) of the Capital Allowances Act, and Amendment No. 57 frustrates these provisions in cases in which neither the lessor nor the lessee is trading. Amendment No. 52, which merely brings the wording of Clause 43 into accordance with that used in the Amendments to Clause 45, and Amendment No. 52 are consequential.

I apologise for burdening the House with that explanation, but I felt that it should be on record.

Amendment agreed to.

Mr. Deputy Speaker

With the permission of the House, I will take Amendments Nos. 53 to 57 formally.

Amendments made: No. 53, in page 41, line 1, leave out from 'trade ' to end of line 2 and insert: 'from the time when the trade is treated as begun until the time when the lessor permanently ceases to let it otherwise than in the course of a trade, and then as permanently ceasing to be so used'.

No. 54, in page 41, line 10, leave out from ' but ' to end of line 13 and insert: 'as from the determination of the lease, section 41(5) above shall have effect as if the capital expenditure on providing the machinery or plant had been incurred by the lessor and not by the lessee'.—[Mr. Higgins.]

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