Mersey Docks and Harbour Company Wins Capital Allowances Case

The case, referenced as [2024] UKFTT 001163 (TC), centred on whether the £57.13m expenditure on the quay wall qualified for plant and machinery allowances (PMAs) under the Capital Allowances Act 2001 (CAA 2001).  This ruling has far-reaching implications for the company and potentially for other businesses in similar circumstances, pending any further legal challenges.

Capital Allowances Background

Capital allowances are a form of tax relief available to businesses on certain types of capital expenditure.  Under the CAA 2001, businesses can claim allowances on qualifying expenditure, which reduces their taxable profits.  Capital allowances are in lieu of tax relief on the depreciation of assets, which is not available in the UK.  The key sections of legislation relevant to this case include:

Section 11:  Provides for allowances on qualifying expenditure on certain plant and machinery assets.

Section 22:  Exclusion of certain assets/structures, including docks and harbours, from capital allowances (List B) – unless, as in long established tax practice, these are “excluded from the exclusion”!

Section 23:  Lists specific items that are unaffected by ss.21 and 22, therefore qualifying as plant or machinery, including machinery and structures provided mainly to carry plant or machinery (List C).

It is important to note that, as this expenditure was incurred in the Appellant’s accounting periods ending 31 March 2015 to 31 March 2018, the Structures and Buildings Allowances (SBAs) - that would otherwise now be available on structures since their introduction in October 2018 - were not available at this time.

Case Summary and Issues

The tribunal had to address three primary issues to reach its decision:

1. Identification of the Asset:  The first issue was whether the quay wall should be considered a distinct asset or part of a larger whole, including the Container Transition Area (CTA).  The distinction was crucial for determining the eligibility for capital allowances.  If the quay wall was part of a larger asset, it might not qualify for allowances in the same way a distinct asset would.

2. Function as Plant:  The second issue was whether the quay wall functioned as plant or machinery.  Under the CAA 2001, only certain types of assets qualify for capital allowances, and the quay wall’s function needed to be assessed to determine if it met the criteria.  The classification of the quay wall as plant or machinery was essential for it to be eligible for capital allowances.

3. Expenditure Qualification:  The final issue was whether the expenditure on the quay wall was ‘saved’ by item 1, 22 or 24 of List C, s.23 CAA 2001.  As noted above, List C schedules out specific types of expenditure that are excepted from the general exclusions in List B, s.22 CAA 2001 and the tribunal needed to determine if the quay wall’s construction costs fell under this category.  The interpretation of List C was pivotal in deciding the case outcome.

Tribunal’s Findings

1. Distinct Asset: The tribunal found that the quay wall constituted a distinct asset separate from the CTA. This finding was based on the quay wall’s unique function and structure, which differed from the rest of the port’s infrastructure. The tribunal noted that the quay wall had different characteristics, activities and purposes that set it apart from other assets within the port. This distinction was crucial in establishing the quay wall’s eligibility for capital allowances.

2. Function as Plant:  The tribunal determined that the quay wall functioned as plant.  It primarily supported the Ship-to-Shore (STS) cranes and provided mooring for vessels, which are essential functions for the port’s operations.  The quay wall’s role in facilitating the movement and handling of cargo was a key factor in its classification as plant.  This classification was crucial for the quay wall to qualify for capital allowances, as it demonstrated – in keeping with other case decisions that “where a complex structure, viewed as a whole, has been held to function as plant in the taxpayer’s business and thus passes the premises test” – as a separate business asset, the quay wall was integral to the port’s operation and so plant and machinery.  FTT further relied upon the dicta from Gunfleet Sands - highlighted at paragraph 121 by the UTT in that case, “In summary therefore, Barclay Curle does not impose a necessity test but makes the point that “provision of plant” may cover more than the cost of plant itself or its actual supply [emphasis added].  It can also cover expenditure on installing the plant on the basis that without installation the plant cannot be said to have been provided for the purposes of the trade.”  FTT concluded at paragraph 81 of this decision that “It seems to us that every part of the Quay Wall plays an essential part in getting large vessels into a position where loading and unloading can take place, and that it is wrong to regard any part of the Quay Wall as a mere setting or part of the premises in which this operation takes place.  The whole Quay Wall is, we think, the means by which, or plant with which, the operation is performed [emphasis added].”

3. Expenditure Qualification:  The tribunal concluded that the expenditure on the quay wall was on the provision of plant or machinery.  As such, it qualified for capital allowances under item 1, List C, s.23 CAA 2001 – being “Machinery (including devices for providing motive power) not within any other item in this list”.  The tribunal’s interpretation of List C was instrumental in reaching this conclusion, as it provided the necessary legal framework for the quay wall’s eligibility and overcome the default exclusion under item 5, List B, s.22 CAA 2001 being expenditure on a “dock, harbour, wharf, pier, marina or jetty or any other structure in or at which vessels may be kept, or merchandise or passengers may be shipped or unshipped.”

Conclusions

The tribunal allowed the appeal by The Mersey Docks and Harbour Company Limited, granting them the capital allowances (as PMAs) for the quay wall expenditure.  This decision has significant implications for the taxpayer, as it allows them to claim tax relief on the construction costs of the quay wall.  The ruling provides a substantial financial benefit to the company, reducing their tax liabilities and freeing up resources for further investment in port infrastructure.

The case also potentially sets a precedent for other companies in similar situations, providing clarity on the eligibility of quay walls and similar ‘ancillary’ structures for capital allowances.  The tribunal’s detailed analysis of the quay wall’s function and classification offers valuable guidance for businesses seeking to claim capital allowances on similar assets.  Unless challenged by HMRC, this decision is likely to influence future cases and provide opportunity to broaden the scope of qualifying expenditure – also pending a future consultation by HMRC and HM Treasury as announced in the October 2024 Budget.

The ruling highlights the importance of understanding the specific functions and classifications of assets when determining eligibility for capital allowances.  It underscores the need for companies to carefully document and justify their claims to ensure they meet the criteria set out in the CAA 2001.  The tribunal’s decision emphasises the necessity of a thorough and detailed approach to asset classification and expenditure qualification.

The case also serves as a reminder to other businesses of the importance of staying informed about tax legislation and seeking expert advice when necessary.  The complexities of capital allowances and asset classification require a deep understanding of the relevant laws, prior case precedents and regulations.  Companies that invest in expert advice and thorough documentation are better positioned to navigate these complexities and secure favourable outcomes if challenged by HMRC.

E³ Consulting eagerly await HMRC’s decision in progressing any further appeal on this matter.  In our experience, such significant cases are rarely left at a FTT decision and usually progress up through the court system over a number of years – where HMRC consider the result unsatisfactory.  It may be a while yet before taxpayers can truly have certainty of the outcome on such expenditures.  Given that this case discusses such fundamental interpretation of the CAA 2001 and specifically the Lists A, B and C in ss.21, 22 and 23 of the Act – which are at the core of this tax relief, we expect that it will rumble on further yet!