BMBF No 24 Limited v Inland Revenue

In a chain of leases involving plant or machinery used by a non-resident, the lease relevant to the finance-lease conditions in section 42(3) of the Capital Allowances Act 1990 is the lease granted by the owner claiming allowances, ordinarily the headlease. A finance lease further down the chain does not by itself withdraw the owner’s allowances. The qualifying-purpose condition in section 42(3) has independent effect, and the relevant use in a multi-lease case is the non-resident’s use under the sublease. For the permitted-leasing condition in section 42(1), it is sufficient that the lease to the non-resident is permitted leasing. The appeal was dismissed because the owner’s headlease satisfied the finance-lease condition.

BMBF No 24 Limited acquired plant and machinery used in the United States, granted a finance lease to a United Kingdom resident subsidiary, and consented to a sublease to the United States manufacturer. It claimed writing-down allowances under section 24 of the Capital Allowances Act 1990.

The Special Commissioners decided for the Revenue on ownership and on whether the finance-lease conditions were satisfied. Mr Justice Etherton reversed the ownership finding but held that the relevant lease under section 42(3) was the headlease. He also upheld alternative findings concerning the sublease. The appeal concerned which lease was relevant under section 42(3), and, if the sublease was relevant, whether the statutory conditions were satisfied.

1. Disposition. The appeal was dismissed. The Court did not need to determine the statutory conditions in section 42(3)(d) and (e), because the appellant failed on the question of which lease was relevant.
2. Section 24 of the Capital Allowances Act 1990 provides the ordinary 25 per cent writing-down allowance for qualifying capital expenditure on plant or machinery. Section 42 removes or reduces that incentive where the plant or machinery is used for leasing to a non-resident who does not use it exclusively to earn profits chargeable to United Kingdom tax. Section 42(2) generally reduces the allowance to 10 per cent. Section 42(3) withdraws allowances where the plant is used otherwise than for a qualifying purpose and one or more of the specified finance-lease features is present.
3. For the permitted-leasing condition in section 42(1), the relevant leasing may be the lease to the non-resident. Section 48 supports that construction. In a chain of leases, section 42 does not reduce or deny allowances where the onward lease to the non-resident is permitted leasing.
4. The requirement that the plant be used otherwise than for a qualifying purpose has an independent role. In a multi-lease case, the relevant use is the use by the non-resident lessee under the sublease. If that use falls within section 39(2), the owner may receive the reduced 10 per cent allowance under section 42(2).
5. For the finance-lease conditions in section 42(3)(a) to (e), the relevant lease is the lease granted by the owner claiming the allowances. In a chain of leases this is the headlease. The statutory scheme seeks broad fiscal neutrality where the owner’s rental stream matches the reduced allowance. It would be irrational to withdraw the owner’s allowances merely because a later sublease is a finance lease when the owner’s own lease is not.
6. An owner may protect the availability of allowances through appropriate headlease restrictions on subletting to non-residents, subject to the permitted-leasing and qualifying-purpose provisions.

• Court of Appeal (Civil Division) — [2003] EWCA Civ 1560. Appeal dismissed. The relevant lease under section 42(3) was the owner’s headlease.
• High Court, Chancery Division — Order dated 26 November 2002 by Mr Justice Etherton. The equipment was held to belong to BMBF No 24 Limited, but the relevant lease under section 42(3) was held to be the headlease.
• Special Commissioners — Decision dated 12 December 2001. The Commissioners decided against the taxpayer on ownership and on the finance-lease issues, but in its favour on the identity of the relevant lease and expenditure.