What words are worth for capital allowances
The upper tribunal weighed up the meaning of words describing parts of a hydroelectric power system to determine which costs qualified for capital allowances. This decision has long-term implications for all structural projects.
In August the first tier tribunal (FTT) allowed a huge capital allowances claim for virtually all of the items HMRC had disputed on a major hydroelectric power scheme, constructed by SSE Generation Ltd. However, HMRC was not happy with the FTT’s decision, so it appealed, and the upper tribunal (UT) recently reported its findings.
What was the outcome of the appeal?
The UT found that all the assets in dispute qualified for capital allowances in full but sometimes reached that conclusion for different reasons than those argued at the FTT.
Order of steps
HMRC’s capital allowances manual used to effectively instruct HMRC officers to seek to disallow expenditure because it was incurred on “buildings” (CAA 2001 s 21) or “structures, assets and works” (CAA 2001 s 22). Only if that exercise failed, the HMRC officer was to consider whether the asset functioned as business apparatus (plant) under common law.
That approach was rejected by the FTT in the SSE case (TC06618) and in other recent capital allowances cases. It has now also been rejected by the UT.
The UT noted that CAA 2001 ss 21 and 22 do not say that the items listed there are not plant (which is determined by case law). Instead, the UT concluded that despite being plant some assets still do not qualify for capital allowances.
HMRC has updated its capital allowances manual at para CA21010 to reflect this.
What the labels mean
The UT held that if a word is used in its ordinary sense, then it should take its ordinary meaning unless that results in a perverse outcome. The dictionary definition of the word is helpful, but not conclusive. The UT considered the following capital allowances terms as used in CAA 2001, s 22 (1) List B.
This had a narrower meaning in CAA 2001 than the dictionary because the words immediately surrounding it all had a transportation theme. It was a subterranean passage through an obstacle for a railway, road, or canal to pass through.
Bridge and viaduct
These structures permitted vehicles or pedestrians to travel over an obstacle.
This means a bridge-like structure for carrying water, typically, a canal carried over a river or valley. Because of the transportation theme of its surrounding words, it did not mean its other dictionary meaning of an artificial channel for the conveyance of water from place to place. So, counterintuitively the conduits carrying water from streams to the reservoir were not “aqueducts” for capital allowances purposes!
Cuttings and embankments
These are structures resulting from clearing obstacles when constructing a road, railway or inland navigation.
This includes all pipelines, not just those with the primary purpose of carrying utility conduits. A crucial feature of a pipeline is that it should be made up of individual lengths of pipe joined together, not, for example, the hydroelectric scheme ‘drilled and blasted’ conduits formed from rock.
Land alteration costs
The UT noted that if an asset is ruled out by CAA 2001 s 22, List B (eg, because it is a tunnel or aqueduct) then it cannot qualify for capital allowances unless it is saved either by the:
- Exceptions listed in CAA 2001 s 22 item 7(a) to (c), which covers industrial buildings; gas extraction, production, processing or distribution; or telecommunications, TV or radio structures; or
- Exemptions in CAA 2001 s 23 List C. That is, ‘machinery’, ‘gas and sewerage systems’, ‘manufacturing and processing equipment’ and so on.
If an asset is saved by these provisions it is not necessary to disqualify some or all of the cost because it also involves land alterations. In other words, the legislation distinguishes between “a structure or other asset” (CA 2001 s 22(1)(a)) and “any works involving the alteration of land” (CAA 2001 s 22(1)(b)) and these are mutually exclusive.
This means that land works are only disqualified if the alteration of land is the objective in its own right. But if the objective is to create an asset that is saved by one of the exceptions or exemptions mentioned above, then the land alterations also remain eligible for capital allowances.
When a business pays to erect a mobile phone mast, this would inevitably require land alterations to create a base for the mast. It would be wrong to disallow the cost of the mast (which is specifically allowed by CAA 2001 s 22 item 7) just because installing it involved works to alter land. Nor would it be appropriate to split the cost between the mast and the land alterations and disqualify the latter.
Install or create?
The law includes an exemption that allows: “the alteration of land for the purpose only of installing plant or machinery” to qualify even if it also relates to a “building” or a “structure or other asset” as defined. When looking at this provision, the UT concluded that the FTT had erred in law when it decided that land alterations to create an asset were carried out to install the asset.
The UT held that terms “install”, “installing” and “installation” should take their ordinary meaning in the context of the words surrounding them.
In relevant case law, “installing” has meant putting something which already existed as plant into position, rather than constructing the asset in place. Of course, if an asset is built that qualifies for capital allowances, then even though any land alterations would not be to “install” it, they would probably qualify as part of the cost of its “provision” under the general conditions of CAA 2001 s 11.
As this decision by the UT (equivalent to the High Court) creates a binding legal precedent, it may be relevant in practice for years to come.
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Steven Bone is a director at tax incentives specialists, Gateley Capitus. Previously he held senior specialist positions in major and mid-tier accountancy firms. He is a tax-qualified chartered surveyor and specialises in capital allowances and related property tax reliefs. Email: ...