Finance Act 1996 Section 197

Section 197 of the Finance Act 1996 in the United Kingdom deals primarily with the treatment of leased assets and, more specifically, with the restrictions on claiming capital allowances for leased assets in certain circumstances. This section aims to prevent tax avoidance schemes that exploit the capital allowances system.

At its core, Section 197 addresses situations where the main or one of the main benefits that could reasonably be expected to arise from a lease is the obtaining of a tax advantage, such as claiming capital allowances. This provision targets arrangements designed primarily to shift capital allowances from a taxpayer who could not fully utilize them (e.g., due to losses) to another taxpayer who could benefit from them. It’s important to understand that the legislation focuses on the purpose of the leasing arrangement, not necessarily the fact that capital allowances are claimed.

The primary effect of Section 197 is to restrict or disallow the availability of capital allowances for the lessee (the person leasing the asset) if the following conditions are met:

• The lessee is incurring capital expenditure on the provision of plant or machinery (the asset being leased).
• The asset is provided for leasing.
• The obtaining of a tax advantage for the lessee is a main or one of the main benefits that might reasonably be expected to arise from the transaction.

If these conditions are satisfied, then the capital allowances available to the lessee are restricted. The restriction can take various forms, depending on the specific circumstances of the lease. In some cases, no capital allowances may be claimed at all. In others, the amount of allowances may be reduced to a level deemed appropriate by HM Revenue & Customs (HMRC) to negate the perceived tax advantage.

Determining whether a “tax advantage” is a main benefit requires careful consideration of all the facts and circumstances of the leasing arrangement. Factors that HMRC will consider include:

• The commercial justification for the lease.
• The parties involved in the lease and their relationships.
• The terms of the lease, including the lease rentals.
• The tax position of the lessee and lessor.

Section 197 provides HMRC with considerable power to scrutinize leasing arrangements and deny capital allowances where it believes a tax avoidance motive exists. The burden of proof generally rests on the taxpayer to demonstrate that the main purpose of the lease was not to obtain a tax advantage. This can be a complex and challenging task, often requiring expert advice and documentation.

The impact of Section 197 extends beyond simple lease arrangements. It can also affect more complex financing structures involving leases, such as sale and leaseback transactions. Businesses entering into leasing arrangements, especially those involving significant capital expenditure, should carefully consider the potential application of Section 197 and seek professional tax advice to ensure compliance and mitigate the risk of disallowed capital allowances.

In essence, Section 197 is a safeguard against the artificial exploitation of the capital allowances regime through leasing transactions, designed to ensure that tax benefits are only available where they are genuinely intended by the legislation.