Sale and leaseback a case study Transaction

The Producer, a UK company, sells a film to a partnership for, say, £10 million and enters into a 15-year lease.

Invoicing a. Producer issues an invoice to the partnership for £10 million + VAT @ 17.5 per cent ( = £1,750,000).

b. The partnership invoices producer for all 15-year lease payments for, say, £13 million + VAT @ 17.5 per cent (= £2,275,000).

Treatment of VAT on above

VAT applies where the seller/lessee is a UK company. In the above example, the producer is therefore in a net VAT payable position to the partnership of £525,000 ( = £2,275,000 less £1,750,000). If there is perceived to be a credit risk to the partnership, part of the benefit from the transaction payable to the producer may be escrowed until the VAT works its way through the system.

Cash movements

Purchase price: £10,000,000

Amount placed on deposit by producer at guarantor bank to guarantee lease rental payments: (£9,000,000) Gross benefit to producer (12.0 per cent): £1,200,000 Guarantee cost (estimated at 0.45 per cent): (£45,000) Legal: (£5,000) Audit: (£5,000)

Net benefit: £1,145,000

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