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HMRC have published Brief 40/07, which provides revised guidance on capital allowances on overseas leasing under CA 2001, ss. 109 and 110, in relation to leases entered into before 1 April 2006.

The Capital Allowances Act 2001, Part 2, Chapter 11 contains rules in connection with leasing plant or machinery to lessees based outside the UK. Within this chapter, sections 109 and 110 restrict the amount of writing down allowances that may be claimed:

• where section 109 applies the rate of writing down allowances is reduced from 25% to 10%, but
• where section 110 applies no capital allowances are available.

Following changes made in Finance Act 2006 the overseas leasing rules do not apply to leases entered into on or after 1 April 2006.

HMRC are aware of arguments that these rules are contrary to Community law. In particular it is argued that they constitute an unlawful restriction on the freedom to provide services. HMRC now accept that in some circumstances these rules may be contrary to Community law and they have decided not to contest certain claims.

Therefore, where plant or machinery is used for overseas leasing and the lessee is resident in an EEA country HMRC will adopt the following approach:

• where the relevant EEA country gives the lessee a relief that is broadly equivalent to capital allowances, HMRC will apply s. 109 to restrict the rate of writing down allowances to 10% but they will not apply s.110;
• where the relevant EEA country does not give the lessee a relief broadly equivalent to capital allowances HMRC will accept that the lessor is entitled to the normal 25% rate of writing down allowances.

Link

HMRC: Brief 40/07