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Court of Appeal decision released on CAA2001 definitions of structure

Court of Appeal decision released on CAA2001 definition

The Court of Appeal has affirmed the Upper Tribunal’s decision representing a victory for the taxpayer on all the capital allowances points.

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The Court of Appeal (CA) decision in SSE Generation Limited v HMRC concerned specifics of the definition of ‘structure’ for capital allowances purposes. The decision contains insights on statutory interpretation. In particular it expounds the principle noscitur a sociis (the ‘immediate context’ rule) to show how a word in tax statute such as ‘tunnel’ or ‘aqueduct’ can take a specific meaning from the surrounding words. The CA dismissed HMRC’s appeal against the decision of the Upper Tribunal (UT) barring one procedural point.

Background and summary

In this case, SSE Generation Limited (SSE) spent £300 million on a hydroelectric power generation scheme. HMRC disputed £227 million of SSE’s £260 million capital allowances claim, including:

  • Water conduits between the water intakes and the main reservoir (used for gathering water into the reservoir);
  • The headrace (carrying water to the turbine); and
  • The tailrace (carrying water away from the turbine into Loch Ness).

It was undisputed that these assets were plant under common law and that they were structures that would fall within the definition of industrial buildings. The expenditure would thus qualify for capital allowances unless it fell within Items 1-6 of List B in s.22 CAA 2001.

Tunnels and aqueducts

The disputed items would therefore not qualify for allowances if they were ‘tunnels’ or ‘aqueducts’ within Item 1 of List B s.22 CAA 2001. HMRC had argued for a wide reading of these terms, and that the items should not fall in any of the List C exceptions. The CA decision essentially confirms that these terms in their context should only be applied to tunnels or aqueducts used for transportation. On this basis allowances were not denied by Item 1 and the expenditure was able to fall in Item 7 based on the ‘industrial building’ definition being met.

Item 1 should be taken to be related to transportation only as the other items listed in Item 1 are transport assets such as bridges and viaducts. (Questions about List C were not relevant in the CA judgment as they ruled that the expenditure fell outside List B and did not need the ‘get out of jail card’ of Item 22 (or Item 25) in List C.)

The S22(1)(b) CAA 2001 argument

The court also had to consider whether the two legs of s.22(1) are mutually exclusive. If an item of plant is a structure or other asset but it is not within List B, is it necessary also to look at s22(1)(b) to determine if it falls to be ‘works involving the alteration of land’?

The CA agreed with the First-tier Tribunal (FTT) and UT that these two legs were alternatives. This was based on a logical approach to statutory interpretation – a significant point being that s22(1)(b) on HMRC’s reading would neuter most claims which were based on satisfying item 7(a) in List B.

Conclusion

The decision is very fact-specific, but it is a good reminder that when construing statutory language:

  • Words will normally take their standard English meaning; but
  • The legislative setting in which a term is used will flavour its specific meaning.

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