Section 29 Finance Act 1983: Capital Allowances and Leased Assets

Section 29 of the Finance Act 1983 in the United Kingdom addressed complexities surrounding capital allowances, particularly in relation to leased assets. It aimed to prevent tax avoidance schemes that exploited loopholes in the existing legislation. The core of Section 29 focused on modifying the rules governing capital allowances for plant and machinery where the assets were leased out rather than directly used by the owner.

Prior to Section 29, companies could claim capital allowances on assets they owned and leased to others, even if the leasing arrangements were structured in such a way that the owner retained little or no real economic risk or reward. This created opportunities for tax advantages, allowing businesses to offset their taxable profits with accelerated depreciation on leased assets, essentially transferring tax benefits to lessees through reduced lease payments.

The primary thrust of Section 29 was to restrict the availability of capital allowances to the lessor in situations where the leasing arrangement was considered to be primarily driven by tax avoidance rather than genuine commercial activity. This was achieved through a complex set of tests and conditions, designed to identify “artificial” leasing arrangements.

One key aspect was the concept of “qualifying expenditure.” Section 29 redefined what constituted qualifying expenditure for capital allowance purposes in specific leasing scenarios. It introduced provisions that could reduce the amount of expenditure eligible for allowances, or even deny them altogether, if the lease terms or ownership structure were deemed to be primarily motivated by tax advantages. Factors such as the length of the lease, the purchase option price (if any), and the relationship between the lessor and lessee were taken into account.

Specifically, Section 29 contained provisions relating to:

• Restricting Allowances on Certain Leased Assets: If the lease terms were designed to artificially inflate the value of the asset for capital allowance purposes, the allowances could be restricted.
• Disallowing Allowances Where Main Benefit is Tax Advantage: If the main or one of the main benefits expected from the lease arrangement was the obtaining of a capital allowance, the allowances could be denied. This was a subjective test and required careful analysis of the motivations behind the lease.
• Sale and Leaseback Arrangements: Section 29 also addressed sale and leaseback arrangements, where a business sells an asset and then leases it back. It ensured that these arrangements were not used to artificially generate capital allowances.

The impact of Section 29 was significant. It increased the complexity of structuring leasing arrangements and required businesses to carefully consider the tax implications of their leasing transactions. It also led to increased scrutiny from tax authorities regarding leasing arrangements, with a greater emphasis on demonstrating genuine commercial purpose.

While Section 29 was intended to curb tax avoidance, it was recognized that it added significant complexity to the tax system. Subsequently, many of its provisions were modified and superseded by later legislation. However, the principles established in Section 29, particularly the focus on preventing tax-driven leasing arrangements and ensuring that capital allowances reflect genuine economic activity, continue to influence the tax treatment of leased assets today.