Cavernous divide in ‘plant’ arguments

Having lost their initial appeal at an Upper Tribunal (Tax and Chancery Chamber) (UT), further to the initial ruling at the First Tier Tribunal (FTT) (Tax) (see earlier decision here) the taxpayer returned for another bout in Cheshire Cavity Storage 1 Limited and EDF Energy (Gas Storage Hole House) Limited v The Commissioners for HM Revenue and Customs [2022] EWCA Civ 305.

The case is a clear reminder to taxpayers that claiming capital allowances and optimising your tax position is far from certain and rarely straight forward.  Optimising tax claims requires a blend of skills – to identify the project expenditure, dissect these into the different categories of allowances, as well as expert knowledge and understanding of over a century of precedent case law all interwoven with the prevailing tax legislation.

Background

The taxpayer had initially claimed capital allowances in respect of their expenditure on the development, construction and operation of underground natural gas storage cavities, formed through a process of leaching and de-brining, the details of which are described in our above earlier article.

The UT had upheld the decision of the FTT in the original appeal that the cavities were ‘premises’ rather than ‘plant’ – assets simply having a ‘plant-like-function’ does not constitute the asset being ‘plant’.

This is an important distinction as items of ‘plant’ are allowable for a tax deduction under capital allowances, whereas ‘premises’ are generally not, excepting the more recent Structures & Buildings Allowances.

This appeal was heard on that distinction and ultimately whether the UT had erred in law in upholding the decision over the meaning of ‘plant’ for capital allowances purposes; a definition set out over 135 years of case law originating with Yarmouth v France [1887].

UT did not misapply the law

The case heard detailed arguments with reference to a number of landmark capital allowances decisions on the meaning of ‘plant’ following on from the above 1887 definition.

Many assets have come under the spotlight in key case decisions over the years, each building upon the precedent handed forward.  Some of the cases relied upon by the courts in this case include those deciding on ‘plant’ such as the dry docks in IRC v Barclay Curle & Co Ltd [1969] or the swimming pool in Cooke v Beach Stations Caravans Ltd [1974], and those decided as ‘premises’ including the ship in Benson v Yard Arm Club Ltd [1979] or the quarantine kennels in Carr v Sayer [1992].

The taxpayer was ultimately unsuccessful in their quest to overturn the decision and further to HMRC’s contentions, the CA upheld the lower courts’ decision that the cavities did not constitute ‘plant’.

The CA did in fact go further than the UT when handing down their decision, giving additional detailed explanations to evidence that the UT made no error in law.

In their decision, the Judges noted that the cavities constituted land “in the same way as a worked out quarry or mine” considering that “no man-made structure or equipment is introduced…into the cavities”.  They went on to say “in order for expenditure on land to qualify as expenditure on plant, it must be associated with something that is itself recognisable as plant”.  The CA recognised that the only element that had been introduced into the cavities other than the taxpayers stock, namely the natural gas stored as part of their business function, was a cushion gas to prevent the collapse of the cavities.

There have been only a handful of decisions that have allowed the inclusion of land as part of the asset qualifying as ‘plant’, where the entire asset as a whole carried out the ‘plant’ function.

In fact, the Capital Allowances Act 2001 at s.23 only allows “the alteration of land for the purpose only of installing plant or machinery” as qualifying ‘land’ expenditure.

The case ultimately hinged on the application of the ‘premises test’ originally coined in Wimpy International Ltd v Warland [1988] to distinguish between the ‘premises’ in which the business is carried on and the ‘plant’ with which it is carried on.

‘Plant’ in practice

With 135 years of precedent case law and dedicated legislation defining those items qualifying, it may seem that making a claim for capital allowances should be ‘cut and dry’.  However, we are reminded by such specialist facilities and ever advancing technology, that there is a distinctively fine line between ‘plant’ and ‘premises’.

Complex project situations, as in this case, require specialist knowledge of the legislation and case law.  As technology progresses, we are sure to see continued legal action taken by both taxpayers and HMRC where each believe they are applying the legislation correctly.  Taking advice early can be the difference between being on the right or wrong side of the decision - and valuable tax savings!

Further action

If you would like to discuss this case decision or any wider Capital Allowances queries with one of our team, do get in touch as soon as possible.  Early advice should provide an ability to explore the most comprehensive options available for your project 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.