Finance Bill Tracking Service 2010 | Budget 2010


Who is likely to be affected?

1. Businesses operating gas storage facilities and lessors of cushion gas.

General description of the measure

2. Legislation will be introduced in Finance Bill 2010 to treat:

•    all leases of cushion gas as funding leases; and

•    all expenditure on cushion gas as special rate expenditure, qualifying for writing-down allowances (WDAs) at 10 per cent a year.

Operative date

3. The provision in relation to leases of cushion gas will apply to leases commencing on or after 1 April 2010, except where there is a contract for the lease before that date, and the contract is unconditional or, if conditional, the conditions have been met and no terms remain to be agreed.

4. The provision in relation to the rate of WDAs on cushion gas will apply to expenditure incurred on or after 1 April 2010.

Current law and proposed revisions

5. Capital allowances allow businesses to deduct the costs of capital assets, such as plant and machinery, against their taxable income. They take the place of commercial depreciation which is not allowed for tax. The main rate of WDA is 20 per cent a year, for general plant and machinery, and 10 per cent a year, for "special rate" plant and machinery.

6. At Budget 2009 the Government announced that capital expenditure on cushion gas that functions as plant in a gas storage facility qualifies for plant and machinery capital allowances, but said it would discuss, with the industry, certain technical and revenue protection issues arising from this treatment.

Funding leases of cushion gas

7. In 2006, legislation was introduced taxing longer leases (broadly more than five years) that function as financing transactions ("long funding leases"), by reference to their commercial substance rather than their legal form. As it is accepted that cushion gas in a gas storage facility constitutes plant, it may be leased under a plant and machinery lease.

However, cushion gas is different from most other plant and machinery in that it does not wear out. It would, therefore, have been possible to write very long operating leases of cushion gas, without ever triggering the application of the long funding lease rules. This could have meant that leases of cushion gas would have been taxed by reference to their legal form, rather than commercial substance, which would have been at variance with the 2006 reforms.

8. To prevent this effect, the new legislation will treat all leases of cushion gas as funding leases with effect from 1 April 2010. This will ensure that, where cushion gas is leased for more than five years, the lessor will be taxed by reference to the commercial substance, rather than the legal form, and the lessee if tax resident in the UK will have the option to claim the capital allowances.

9. With effect from 1 April 2010, any lessee of cushion gas under a funding lease will have the choice of either claiming a deduction for the lease rentals in accordance with the accounting treatment, or of opting to claim capital allowances with a restricted deduction in respect of the lease rentals.

Rate of WDAs

10. A new category of "special rate expenditure" was introduced in 2008. This category includes expenditure on "long-life assets" (assets that are expected to have a useful economic life, when new, of at least 25 years) and certain other assets (for example, "integral features" of a building) that have, on average, a longer economic life than the generality of plant and machinery. In general, the 10 per cent rate of WDA is considered to be more appropriate for expenditure in the "special rate" category than the general, 20 per cent rate.

11. As cushion gas does not wear out or necessarily lose its value by the mere passing of time, the Government has decided that the 10 per cent "special rate" of WDA is the more appropriate rate for expenditure on an unusual asset of this kind. The new legislation will, therefore, specify that expenditure on cushion gas will be a further type of special rate expenditure in order to fix the rate of WDA at 10 per cent a year.

Further advice

12. If you have any questions about this change, please email or or telephone 020 7147 2610. Information about Budget measures is available on the HM Revenue & Customs website at