What is a capital payment under section 809ZE of the Income Tax Act 2007?

A capital payment is any payment connected with a lease of plant or machinery that would not be taxed as income of the lessor. This captures lump sums, premiums, and other non-revenue amounts. Payments that would be income but for long funding finance lease rules under section 148A of ITTOIA 2005 are also excluded from being capital payments.

When does a capital payment become a relevant capital payment under United Kingdom law?

A capital payment becomes relevant under two conditions. Condition A applies when the payment is made in connection with the grant, assignment, novation, or termination of the lease. Condition B applies when the lease rentals are lower or later than expected because part of the cost has been shifted into the capital payment.

What exclusions prevent a capital payment from being treated as relevant?

Two exclusions apply. First, a capital payment is not relevant to the extent it reduces the lessor's qualifying expenditure for capital allowances under the Capital Allowances Act 2001. Second, a capital payment made as compensation for physical damage to the plant or machinery, or damage caused by it, is also excluded from relevant status.

How are initial payments under long funding leases treated for section 809ZE purposes?

Where a capital payment is an initial payment under a long funding lease triggering a disposal event under section 61 of the Capital Allowances Act 2001, only the amount exceeding the disposal value the lessor must bring into account is treated as a relevant capital payment. The portion up to the disposal value is handled through the capital allowances regime.

Income Tax Act 2007 section 809ZE

"Capital payment", "relevant capital payment" etc.

Section 809ZE defines the terms "capital payment" and "relevant capital payment" used in the anti-avoidance rules for leases of plant and machinery, and clarifies what counts as a "payment" for these purposes.

A capital payment is any payment that would not be taxed as income of the lessor — so it captures lump sums and other non-revenue amounts connected with a lease
A capital payment becomes "relevant" if it is connected with the grant, assignment, novation or termination of the lease (or any lease provision), or if it has the effect of reducing or deferring the rentals below what would otherwise be expected
A capital payment is excluded from being "relevant" where it reduces the lessor's qualifying expenditure for capital allowances purposes, or where it compensates for physical damage to or caused by the plant or machinery
Where the capital payment is an initial payment under a long funding lease and the lessor must bring a disposal value into account, only the excess over that disposal value is treated as a relevant capital payment

Access full legislation.And much more.

By becoming a member, your team gets full access to Tax World research tools and source-backed tax resources.

Become a member