Shining the legal spotlight on capital allowances

Judges at an Upper Tribunal (Tax and Chancery Chamber) (UT) have ruled in favour of HM Revenues and Customs (HMRC) in a case involving the creation of underground storage cavities for natural gas.

The UT upheld a ruling by a lower court that the cavities were ‘premises’ rather than ‘plant’ – meaning that expenditure did not qualify for a tax deduction under capital allowances.

This case – Cheshire Cavity Storage 1 Limited and EDF Energy (Gas Storage Hole House) Limited v The Commissioners for HM Revenue and Customs [2021] UKUT 0050 (TCC) – is the latest in a series of disputes in recent years over the sometimes very fine line between what constitutes ‘plant’ and ‘premises’.

However, it has some clear lessons for any business seeking to optimise capital allowances on their property expenditure….

Background

Broadly speaking, capital allowances are available on ‘plant and machinery’ used within businesses but not for the premises in which a business is carried out.  Albeit since the tax periods this case dealt with, the new Structures & Buildings Allowances have been introduced – thereby effectively providing tax relief on all commercial property expenditure, bar some residential uses and land/planning costs that are restricted within the tax legislation.

The definition of ‘machinery’ for capital allowance purposes is fairly straight forward but it is debate over what constitutes ‘plant’ which has caused most confusion and conflict over the years – including here.

The Case

Cheshire Cavity Storage 1 Limited and EDF Energy (Gas Storage Hole House) Limited created underground cavities for the storage of gas from the National Transmission System.

The work involved drilling a borehole into naturally occurring salt rock and injecting water to dissolve the rock, leaving a hole filled with saltwater. Gas was then pumped at high pressure into the cavity and the saltwater expelled.Capital allowances were unsuccessfully claimed by the taxpayers (Cheshire Cavity Storage and EDF) on the expenditure for the leaching and de-brining involved.

On appeal, they argued that an item is plant if it has any function as plant but this was refused by a First Tier Tribunal (FTT) which found that the expenditure incurred did not constitute spending on plant.

The FTT accepted that cavities did have a plant-like function similar to a pump/compressor but that its function as premises was the predominant feature. This meant that the cavities were not classed as plant and capital allowances on the expenditure relating to them was disallowed.

Judges Timothy Herrington and Swami Raghavan upheld the FTT ruling at an Upper Tribunal (Tax and Chancery Chamber).

They drew on long established court cases stretching back over a number of years to determine what constitutes ‘plant’ – including the landmark case of Yarmouth v France decided in 1887 which defined plant as ‘whatever apparatus is used by a businessman for carrying on his business’.

What does this mean?

There can be fine lines in the distinctions between ‘plant’ and ‘premises’ for capital allowances on expenditure.

In this case, the FTT decision did depart from some other established cases but the UT made a strong case in upholding this stance in a detailed 22-page ruling which cited case law chronologically dating back more than a century.

It may be that Cheshire Cavity Storage 1 Limited and EDF Energy (Gas Storage Hole House) Limited v The Commissioners for HM Revenue and Customs [2021] UKUT 0050 (TCC) becomes a landmark case in years to come.

However, the arguments and costly legal action is sure to continue which is why specialist advice about capital allowances should be taken as early as possible – especially in complex project situations or for innovative buildings and technologies at the boundaries of established law.

Further action

If you would like to discuss this case decision or wider Capital Allowances queries with one of our team, do get in touch as soon as possible. Early advice on any matter should provide an ability to discuss the most comprehensive options available in moving your project forward and achieving the optimal tax savings potentially available.

If you have any property tax issues please do get in touch for a no obligation discussion. You can phone the team on 0345 230 6450 or email hello@e3consulting.co.uk.