The equipment leasing industry in the US has endured ongoing attacks from the tax authorities over the past several years (see my post of December 29,2005). After seeing a preview of certain provisions of Finance Act 2006, it now looks like the UK leasing industry may find itself in similar circumstances. One of the provisions of the proposed budget gives the right to claim the capital allowances on leased equipment (the UK version of tax depreciation) to the lessee, instead of the lessor, who is the legal owner. These rules will apply to ‘long-funding leases’ of plant and machinery, which is a very broad and far-reaching category of equipment (see www.nortonrose.com/html_pubs/view.asp?id=5473 for additional detail).
As a bit of background, efficient use of tax benefits is one of the more than 35 reasons why a company may choose to finance its equipment with leasing (some of which may be found at http://www.chooseleasing.org/). For instance, a company with a net operating loss (NOL) cannot currently utilize the tax depreciation associated with buying the equipment. If a lessor buys, and then leases the equipment to the company, however, the lessee receives the benefit of the depreciation in the form of a lower lease payment. The lease, with its sharing of tax benefits, represents a tax efficient form of financing
If the Finance Act 2006 proposals are enacted, however, lessees with NOLs will no longer be able take advantage of lessors’ tax appetites. In addition to effectively turning past practice on its head, this change will increase the cost of financing equipment for lessees in the UK. Another consequence of this change will be a decrease in investment in new equipment by those lessees with NOLs. Lastly, and of equal importance, is the effect on lessors, who will see a decline in their business, creating a further drag on the economy.
While diminution of the tax benefits available to leasing is nothing new to UK lessors, might I suggest that my fellow lessors in the UK take a hint from your cousins here in the States – protect your turf! The position of the US Equipment Leasing Association (ELA) always has been that the tax environment and conditions must reflect a level playing field, which, for those with a soccer mindset, equates to a level pitch. That is to say, there should not be any distinction between types of owners when allocating tax benefits.
The ELA has consistently and diligently protected this concept through lobbying efforts, public relation campaigns, and joint programs with other industries. A level pitch is essential to long-term economic growth and consistent investment decisions. Make certain you continue to play on one!
Thank you, Mirun. I hope this is true.
Posted by: Shawn Halladay | April 9, 2006 2:37 PM | Permalink to Comment