“Bringing on back the Good Times” Part 2 (the small print)

?Last week I posted an article on the reintroduction of 100% First Year Tax Allowance (“FYA”), which UK companies could offset against Corporation Tax, in respect of investments in machinery assets including, I assume, commercial aircraft.?Since 1984, the FYA in the UK has been limited to 25%.

My thoughts were related to the question of whether this tax change, subject to looking at the finer details, could make the UK an interesting and competitive aircraft leasing hub.

As to be expected there is some “small print” including:

1.????The tax break is for a period of three years i.e. ending in March 2026, although the government has indicated its ambition to make the tax change permanent;

2.????For assets with an anticipated long life (25 years or more seems to be the UK government’s definition of long life), the FYA is reduced to 50%.

Both these two items of small print need further comment:

Currently, the Conservative Party is in power and constitutes the UK government, having won a landslide election victory in December 2019. However, the next government election will be no later than December 2024 and the current Opposition, the Labour Party, is well ahead in pre-election polls at the moment.?

There is a while to go before the next government election and there is no certainty that the current government will be in power after December 2024. It is anyone’s guess therefore whether the 100% FYA will make it through to March 2026, never mind beyond that date.

The second detail is the hoary old question of “what is the life of an aircraft”.?Is it more or less than 25 years?

A few years ago, several aircraft lessors were issuing press releases and other such articles proclaiming that the economic life of a commercial aircraft was not reducing and produced their statistics to “prove” it.?

?I was not convinced then and I am even less convinced now.?My feeling is very much that the economic life of commercial aircraft, delivered now and going forward, is less than 25 years. This is not as a result of a statistical survey; it is more a reflection of (a) the competition between major airlines to demonstrate that the average age of aircraft in their fleet is lower than their competitors, (b) reading about how many relatively small commercial airlines and the majority of start-up airlines are ordering and acquiring new aircraft rather than used aircraft and (c) noticing how many under 25 year old aircraft are being parted out.

?Another angle on this economic age question is whether the age calculation, in all cases, begins at the date of aircraft manufacture or at the date the purchaser buys the aircraft.?If it is the latter then a lessor could buy a ten year old aircraft and comfortably qualify for the 100% FYA.

?A summary of my view would be that whilst modern commercial aircraft may have the technical capability to have an operational life of 25 years; commercially their lives (with the exception, maybe, of freighter aircraft) are going to be quite a bit less.

I hope that the UK government does not automatically place new commercial aircraft in the 25 year plus economic life category.?Maybe the industry needs to revisit the data on commercial aircraft life.

On reflection though, even a 50% FYA may have its attractions.

That’s it for today but I have a feeling there will be a Part 3 and, of course, if you are reading this and have a view – let’s hear it.

?

Mike Skinner

Arundel Aviation?