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The Cheshire Cavity Storage Case: gas caverns and capital allowances

The Cheshire Cavity Storage Case

A recent First-tier Tribunal decision held that expenditure on caverns used for storing gas is not expenditure on plant for capital allowances purposes.

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Harinder Soor

Partner – Claims and Incentives

KPMG in the UK

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The Cheshire Cavity Storage 1 Ltd and another v Revenue and Customs Commissioners [2019] UKFTT 498 (TC) case provides insight into the courts’ interpretation of the capital allowances code. Whilst the outcome of the case was specific to its facts, the way the First-tier Tribunal (FTT) analysed the question is instructive when considering the application of the rules to other assets. Tax deductions are not generally available for capital expenditure, but certain assets attract relief by way of capital allowances. This case considered the availability of Plant and Machinery Allowances (PMAs) for costs associated with leaching and debrining caverns to be used for gas storage. PMAs are generally not available for structures and buildings, but are available for plant and machinery. The issue in this case was the meaning of ‘plant’.

The case first addresses the ‘premises’ test, originally set out in Wimpy International Ltd v Warland in 1989. The key issue is that the premises where a trade is carried on are not plant, although various cases over the years have allowed assets, which might be considered as premises but also function as plant, to be considered plant. For example dry docks, swimming pools, water towers and grain silos.

The Tribunal judge summarised the test by saying that premises can be plant only where “its plant-like function is more significant to the taxpayer’s business than its premises-like function”. The taxpayer argued that the gas cavities had a plant-like function as quasi-pumps or pressure vessels, however both of these functions were found to be incidental to the main function of the caverns as premises for storing gas. This led to the conclusion that the gas cavities were not plant.

The judge also considered a number of other issues. The judgment is thus useful for interpreting the provisions of the statute. The first issue was whether List B (items considered as structures) and List C (exclusions from items treated as buildings or structures) of the Capital Allowances Act (Act) should be read descriptively or functionally. On this question, the court adopted HMRC’s position that these lists are exhaustive, at least where the relevant technology predated the introduction of the Act.

The next question considered whether the caverns were structures under List B, specifically whether they fell within an exception for assets “in use for the purposes of an undertaking for the extraction, production, processing or distribution of gas”. The court here held that the caverns did not fall within this exception as they were solely used for the storage of gas and List B did not refer to this.

Finally, a few specific items from List C were considered, all of which were rejected. The caverns were found not to be storage equipment on the basis they were not equipment; they were found not to be silos or storage tanks as a matter of fact, and not to involve the alteration of land for the purposes of installing plant and machinery, on the basis that no plant or machinery was installed. Incidentally, the decision on this final point seems to contradict the recent SSE Generation case.

In summary, although the specific decision of the case is limited to gas storage cavities, the steps the FTT took in coming to this conclusion are relevant for consideration of whether other particular assets are plant, particularly where the assets could also be seen as the premises in which a trade is carried on.

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