Could new Bank of England Scheme help non-bank lessors?
The Bank of England announced a new scheme to replace the Funding for Lending Scheme (FLS).
The £100 billion Term Funding Scheme (TFS) will lend money to banks at close to base rate, but only if the banks keep increasing their lending to the ‘real economy’ of businesses and households.
Many banks with leasing activities - including Aldermore, Cambridge & Counties, Close Brothers, Investec, Lloyds, Metro Bank, RBS Group, Santander, Shawbrook and United Trust Bank - participate in the FLS at present. Several others participated in an earlier part of the FLS.
The FLS isn’t open to non-banks and this has led to concerns that the Scheme is distorting the asset finance market. In response, from 2013 the BoE has allowed participating banks to include lending to certain non-bank credit providers (NBCPs) within the FLS. Specialist leasing companies dealing primarily in finance leases, so most lessors, qualify as eligible NBCPs.
BoE reports show that only RBS Group and Santander have taken up this option. This might be because although lending to NBCPs might help participating banks to access more FLS cash, direct lending to small and medium-sized businesses is worth either five times, or 10 times, as much.
The TFS will also allow participating banks to lend to NBCPs, but for TFS any lending via NCBPs counts as much as direct lending to SMEs. Banks may now be more interested in lending to non-bank lessors, particularly if that could help them to keep increasing their overall lending.
Impact of IFRS 16 on UK tax starts to show
In 2011 the Government rushed through emergency Finance Act legislation that meant any changes to lease accounting rules would have no effect on tax.
It was intended as a short-term fix for what was then thought to be an imminent problem, the publication of a new international accounting standard for leases.
Five years on, and the new IFRS 16 standard was eventually published this January, although it can’t be used until it is approved for use in the European Union (assuming this happens before the UK leaves the EU). For now, all companies using international accounting standards, mostly listed companies, should have it in place by January 2019 although the European approval process could lead to a further delay.
HM Revenue and Customs (HMRC) has sprung into action and published a consultation on how the tax system could be changed to cope with IFRS 16.
Their first option is to require companies using IFRS 16 to keep separate accounts for accounting and tax purposes. It’s more accounting work for lessees, but avoids any major change to the tax system.
Is there a better option? HMRC makes a brave effort to present alternatives in the best light, but the tax authority cannot deliver miracles.
Under the IFRS 16 ‘right of use’ model, all assets will be on the balance sheet of lessees. If the tax system is to follow the accounting, it would suggest that lessees would offset the cost of their leased assets against their profits. For this reason, all three of HMRC’s other options would see an end to lessors claiming capital allowances for what are today operating leases. (Actually under IFRS 16 the same asset will appear on both the lessee’s and lessor’s balance sheets, but HMRC hasn’t attempted to address that minor complication!).
These options might actually simplify lease taxation. Last year Government’s Office of Tax Simplification published its tax complexity index, which found that complexity in lease taxation rules has a greater impact than complexity in any one of the other 106 parts of the tax system they looked at.
Whether the options help businesses to invest in new equipment using leasing is open to question. HMRC appears to assume that lessees have taxable profits against which to offset the tax allowances arising from their ‘right of use’ leased assets.
That could be a particular issue if the right of use model is ever copied into UK accounting standards, which most companies use. The consultation notes that the future of the UK standards is unclear, and if it did happen it would be in 2022 at the earliest. The risk is that lessors could lose their ability to claim tax allowances and pass the benefits on to small and medium-sized businesses.
Having had at least five years to mull over its options, is there any indication which option HMRC prefers?
In its foreword to the consultation, HMRC talks about major changes in the leasing market. We are told, for example, that “over the last few years, many banks have largely withdrawn from leasing being replaced by different types of investors, for example investment funds seeking a steady stream of income”.
Whether or not this is actually an accurate reflection of how the market is changing (the Asset Finance 50 survey might suggest not) it seems clear that HMRC believes the time is right for a quite fundamental change to how leases are taxed.
End of the road for salary sacrifice cars?
The salary sacrifice industry’s summer holidays were spoilt by another HM Revenue and Customs consultation. Three times - in the 2015 Summer Budget, last year’s Autumn Statement and the 2016 Budget Statement - the previous Chancellor drew attention to the effects of salary sacrifice schemes on tax receipts.
In the 2016 Budget Statement, the Government said it wanted to encourage employers to offer certain benefits via salary sacrifice but not others. It said that pension saving, childcare and health-related benefits such as the Cycle to Work scheme would stay eligible.
After the referendum it appeared likely this wouldn’t be top of the Government’s priorities. Analysts noted the majority of the effects on receipts are from the benefits the Chancellor had confirmed wouldn’t change. The leasing industry published information on the benefits of car salary sacrifice schemes for the low-paid, the UK car industry and the environment.
It came as a surprise to the industry to see that HMRC is proposing scrapping salary sacrifice tax benefits for all benefits other than those identified in the Budget Statement. Unusually for a first consultation, no alternative options are presented. A complete reversal of policy is looking unlikely, so the question now is whether some car salary sacrifice benefits can be retained.
Innovative Finance ISA could be open for leasing
The extension of the Innovative Finance Individual Savings Accounts (ISAs) to include securities has been expected following a consultation held in 2015.
HMRC has published draft regulations for the inclusion of debt securities offered by crowdfunding platforms in the Innovative Finance ISA wrapper.
There are no restrictions proposed on the eligibility of securities issued by a finance company. The nearest equivalent scheme, the Enterprise Investment Scheme, excludes investments in companies carrying out leasing and hire purchase activities.
If confirmed, this could the first tax incentive available for private investors in asset finance companies for several decades. It seems a significant potential development, however niche the crowdfunding angle makes it.
Competition regulator pushes bank data sharing
In the final report of its two-year review of the banking market, the Competition and Markets Authority (CMA) concluded that older and larger banks do not have to compete hard enough for customers’ business, and smaller and newer banks find it difficult to grow. The leasing market was deemed to be sufficiently competitive with many businesses choosing to lease from a provider other than their business current account provider.
The CMA’s main remedy in the SME banking area was to require the banks to share data about small businesses’ banking activities. When used in online tools or applications, the CMA expects this data will help businesses to manage and compare different banking accounts.
This focus on data sharing follows a recent Small Business Act provision requiring banks to share information on rejected loan applications, as well as a Bank of England discussion paper on UK credit data in 2014 that backed greater availability of market-wide credit data to support SME loan securitisation.
The CMA remedies may not directly impact the asset finance market, but there is a growing regulatory pressure on banks to share data on SME loan performance, both at the individual business and portfolio levels. Such data sharing arrangements are already in place in the leasing markets in the US and Canada, as well as in Italy.
Julian Rose is director of consultancy Asset Finance Policy Limited (www.assetfinancepolicy.co.uk) and runs the Asset Finance 500 directory of asset finance brokers (www.assetfinance500.uk)