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Capital Allowances and the common law meaning of plant

Capital Allowances and the common law meaning of plant

The FTT has released a decision that dealt with the eligibility for capital allowances on the construction of a hydroelectric power generation scheme.


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The First-tier Tribunal (FTT) has released its decision in the case of SSE Generation Limited (SSE) v HMRC. The case deals with capital allowances on the construction of a £300 million hydroelectric power generation scheme. In summary, HMRC had accepted £34 million as qualifying for capital allowances out of a total claim made by SSE of £260 million. Accordingly some £227 million of capital expenditure was in dispute. The FTT has partially allowed SSE’s appeal and the Tribunal Judge, Kevin Poole, took great care to go through the distinct components of the hydroelectric power plant to explain the construction and engineering, and how it functions in SSE’s qualifying activity. Given the amounts at stake, it was right that the FTT took this amount of care in explaining the basis of its decision.

Some key themes that came out of the case include:

  • The FTT accepted SSE’s argument that it is correct to consider if an item/asset is plant (equipment/apparatus for use in the qualifying activity) before considering the exclusions at s21 and s22 CAA2001, then the exemptions at s23 CAA2001;
  • The FTT was not persuaded by HMRC’s attempt to introduce expert meaning (in a civil engineering context) to the exclusions at s22 CAA2001 – the FTT accepted SSE’s argument that the words in s22 CAA2001 have everyday meaning and should be judged based on how they are grouped in the statutory provisions to draw out basic common themes; and 
  • The FTT also rejected HMRC’s argument that anything which involved the alteration of land should fall within s22(1)(b) CAA2001 whether or not the structure was in s22.

The case provides some much needed re-affirmation on the correct operation of s11 and s21–23 CAA2001 and how the case law tests, built up over many years, define what is plant - much needed because there is no doubt we have seen, in the last few years, a hardening of approach from HMRC to what qualifies for tax relief on capital expenditure.

The FTT largely took a pragmatic and sensible approach to what qualifies for tax relief and dealt with, in a pretty emphatic way, HMRC’s attempts to take the debate away from the context the draftsman had intended.
The specifics of the case are particular to the facility constructed by SSE and quite unique, but they do give us guidance on very important aspects that have wider application:

  • The statutory provisions need to be very deliberately, carefully and contextually applied. The words in the statute need to be given their everyday meaning. It is instructive as you read the judgment how many times Judge Kevin Poole has to deal with the challenges from both sides on the construction of the legislation. The FTT adopted a simple, every day meaning approach to the words in the legislation;
  • There is often confusion as to how s21 to s23 CAA2001 should be interpreted. The incorrect analysis often given is that items in s22 can never qualify as plant and machinery based on case law tests; this is incorrect and likewise s23 does not give a definitive list of plant under case law tests. It is still a requirement to consider the case law principles on whether the item is equipment/apparatus used for the purposes of the qualifying activity, or is it where the qualifying activity is carried on (the setting); and
  • The FTT confirmed at various points how s22(1)(b) CAA2001 (any works involving the alteration of the land) and s23(4), List C item 22, CAA2001 (alteration of land for the purpose only of installing plant or machinery) apply. The FTT also, helpfully, clarified its interpretation of landmark cases such as Barclay Curle, Lowestoft Water.

The difference between HMRC’s and SSE’s position was such that it was always likely that the FTT would be asked to adjudicate. It will be interesting to see if HMRC appeal the decision, which was largely for the taxpayer.

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