At this week’s KPMG Leasing Forum, Paul Hindley of HMRC gave an overview of HMRC’s current thinking on alternative proposals for changes to the tax treatment of leased plant and machinery. At this stage HMRC is suggesting two alternative approaches (with some variants). The first option is the current system with necessary changes to correct issues in legislation - such as references to finance leases - which would not operate effectively under IFRS16. The second option is to align the tax treatment of leased assets more closely with the accounting entries. This would involve some adjustments and anti-avoidance measures and would not be simply ‘tax follows the accounts’. An element of tax incentives may be retained through a lessee option to claim allowances, or through accelerated depreciation
The back story is that IFRS16 ‘Accounting for Leases’ will be effective from 1 January 2019 for most UK companies. The effect of the new accounting standard is that most operating leases will disappear from the perspective of the lessee and they will be required to record a financial liability and a right-to-use asset.
The distinction between a finance lease and an operating lease will cease for most lessees and as a result many aspects of the UK tax rules will fail to apply as intended. For example:
HMRC have already put in place Section 53 FA 2011 which for tax purposes will deem new IFRS16 not to have entered into force. It is however clear that s53 FA 2011 is not a satisfactory long-term solution given that it requires affected companies to maintain two separate sets of accounting records. Hence it is good news that HMRC are grasping the nettle of change.
If the accounts-based second option is adopted, the lessee will claim tax deductions for their finance charge and for the depreciation of their right-of-use asset. HMRC recognise there may be a need for targeted anti-avoidance rules to prevent abuse. The incentive of capital allowances could be preserved by giving lessees the option to claim capital allowances on the right-of-use asset, or by giving a ‘leasing allowance’, namely faster depreciation of the asset for tax purposes.
The loss of capital allowances may be a concern for some operating lessors such as the rolling stock leasing companies whose leases are typically non-long funding leases under current rules.
The intention is the new rules should work for companies which do not, as well as those which do, adopt IFRS16.
The Discussion Document is expected either before 22 July or after 5 September due to the Parliamentary recess. When HMRC publish their Discussion Document we will be covering it in Tax Matters Digest.
Over the next few months HMRC will be holding extensive consultations with industry and the professions. We would encourage active involvement and KPMG will be engaged closely with the process.
A formal consultation on HMRC/HM Treasury’s chosen option is expected at the time of Budget 2017 with legislation to follow in Finance Act 2018, to take effect in 2019.
We expect these proposals to be a major area of focus over the next two years, in their own right and due to the likely interaction of any new rules on leasing tax with BEPS Action 4 and the tax loss carry forward changes.
For further information please contact :