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Sanity in leasing Back  
In the UK the Court of Appeal has reversed previous decisions regarding the Bord G?is ?ireann pipeline sale and lease back. In doing so it has restored some sanity and clarity to the tax treatment of leasing.
The UK Court of Appeal have reversed the UK High Court and UK Special Commissioner Decisions in the Barclays Mercantile Business Finance Limited case. Although technically a case in which Barclays were the defending taxpayer, the case had major implications for Bord G?is ?ireann.

Bord G?is had sold and leased back a UK pipeline in a deal largely involving the Barclays Group. In most ways it was a standard sale and lease back arrangement. The only feature that seemed a little unusual was that the security deposit, which Bord G?is were obliged to make, represented the totality of the proceeds from the sale of the plant. This fact, and the fact that most of the bodies concerned with the financial end of the transaction were within the Barclays Group influenced the Special Commissioners and the High Court to decide that Barclays, who had acquired the pipeline, were not to be treated as having acquired it in so far as capital allowances on their expenditure was concerned.

The High Court decision was commented on in the August 2002 issue of KPMG Tax Monitor so it is not necessary to repeat here the details of the confused judgement in the High Court. In so far as any sense could be made of the High Court judgement it was a view that a transaction, which released no up front cash to the vendor and lessee of plant was not a transaction entered into for the purpose of raising cash and therefore was not a true leasing transaction. The Court viewed it merely as a sale of capital allowances by Bord G?is (who didn’t need them) to Barclays (who could use them) to be brought about by exchanges of funds that appeared to be (to a large extent) self-cancelling in a very global sense.

The Court of Appeal rejected the attempt of the High Court to impose its own view as to the commercial circumstances which are necessary before a transaction constitutes the purchase of an item of plant, and the leasing out of that item of plant. It had no difficulty with accepting a transaction as being a leasing transaction attracting capital allowances even where the deal would confer no benefit on the leasing company were it not for the existence of capital allowances. In other words it endorsed the notion that somebody who does not need capital allowances may effectively sell them, by selling and leasing back the plant item, or of course alternatively by arranging that a financial institution acquire the plant item from a third party and lease it to them. The court accepted that sharing the benefit of the capital allowances between the leasing company and the lessee in such cases (with the lessee getting lease payments which were lower than would be justified having regard solely to the price paid by the leasing company for the plant) was normal and acceptable from a tax viewpoint.

One of the judgements did appear to reserve the court’s position as to how it would view a transaction, which involved non-recourse financing. Gibson LJ said ‘There is (in this case) no non recourse or other uncommercial loan’. He said this in the context of distinguishing the Barclays case from a previous UK case, Ensign Tankers, which held that expenditure financed on a non recourse basis had not truly been incurred for tax purposes. The Irish courts, in the Airspace Investments case, took a different line to that taken in the Ensign Tankers case in the UK. Nonetheless this comment regarding non recourse loans is a reminder that the Ensign Tankers case is still out there and that the Barclays case does not mean that all leasing arrangements in all circumstances would be accepted by the UK courts as attracting capital allowances.

The Barclays case was bedevilled by the fact that about a year ago the UK House of Lords in the Westmoreland Investments case effectively chucked out two decades of their approach to the interpretation of tax statutes, known as the Ramsay and Furniss v Dawson approaches. The UK courts are now trying to come to terms with the new House of Lords approach as set out in the Westmorelands case, and are making heavy weather out of it.

The Barclays case remains essential pre transaction reading for anybody contemplating UK leasing transactions.

Brian Daly is a tax partner at KPMG

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