Capital allowances for expenditure on a building or structure

Incidentally, HMRC disagree with this order of approach, preferring to start at Question 2 and leaving Question 1 until last, on the basis that it is ‘simpler’ that way ( CA 22005 ). However, this is the order of approach preferred by the First-tier Tribunal in SSE Generation Ltd [2018] TC 06618; and, as HMRC acknowledge, the order of approach should ‘make no difference to the outcome’.

Is the item ‘plant’?

The legislation does not define ‘plant’ and so we must look to the long line of case law going back to the non-tax case of Yarmouth v France (1887) 19 QBD 647, where Lindley LJ commented as follows:

‘There is no definition of plant in the Act; but, in its ordinary sense, it includes whatever apparatus is used by a business man for carrying on his business, – not his stock-in-trade which he buys or makes for sale; but all goods and chattels, fixed or moveable, live or dead, which he keeps for permanent employment in his business.’

This definition contains a number of exclusions or tests, including that the item is employed in the business. This test – which Hoffman J referred to as the ‘premises test’ in Wimpy ( Wimpy International Ltd v Warland (HMIT) [1987] BTC 591) – rules out the place in which the business is carried on. So, in considering a building or structure, a key consideration is whether the item is used in the business (plant) or is the setting for the business (premises).

The dividing line between plant and premises has been explored in a number of cases, including the influential case of Carr ( Carr (HMIT) v Sayer [1992] BTC 286) where Sir Donald Nichols V-C identified the following principles:
•‘plant’ suggests ‘equipment or apparatus, either fixed or unfixed’;
•‘plant’ includes equipment of any size: ‘if fixed, a large piece of equipment may readily be described as a structure, but that by itself does not take the equipment outside the range of what would normally be regarded as plant’;
•an item does not cease to be plant ‘merely because it also discharges an additional function, such as providing the place in which the business is carried out’;
•a building does not become plant simply because it is ‘purpose-built’ for a particular activity; and
•it is the function of a building to provide shelter and security for people and goods and so a building used for these purposes is simply being used as a building.

In Cheshire Cavity Storage 1 Ltd, the Court of Appeal rejected the argument that where an item is found to have any plant-like functions it should be treated as plant: ‘on the contrary it is a question of fact and degree; that is to say an evaluative exercise’. In other words, and returning to Wimpy, we need to consider whether it is ‘more appropriate’ to describe the asset as plant or as premises, applying the principles set out above.

Is it excluded from C&As for P&M?

The legislation provides that expenditure on the provision of P&M does not include expenditure on:

•the provision of a building ( s. 21(1) );
•the provision of an excluded structure or other asset ( s. 22(1)(a) ); or
•the acquisition of an interest in land ( s. 24(1) ).
The ‘provision of’ a building or structure includes its construction of acquisition ( s. 21(2) ; 22(2) ).
The legislation provides a limited definition of ‘building’, which is said to include an asset which is ( s. 21(3) ):
(1)‘incorporated in the building’;
(2)is in the building and is of a kind normally incorporated in a building; or
(3)is in, or is connected with the building and is in the following list (‘List A’):
(a)walls, floors, ceilings, doors, gates, shutters, windows and stairs;
(b)mains services, and systems, for water, electricity and gas;
(c)waste disposal systems;
(d)sewerage and drainage systems;
(e)shafts or other structures in which lifts, hoists, escalators and moving walkways are installed; and
(f)fire safety systems.

In Urenco Chemplants Ltd, the Court of Appeal upheld the FTT’s conclusions, as follows: ‘building’ takes its ordinary meaning; that meaning may vary depending on the context; and, in such a situation, it is appropriate to consider both the functions the asset is intended to perform and its structural characteristics.

A ‘structure’ is a ‘fixed structure of any kind, other than a building’ ( s. 22(3)(a) ). A structure or other asset is an excluded structure or asset where it is included in List B. List B includes tunnels, roads, canals, dams, docks and dikes, and similar assets.
It should be noted that expenditure which is incurred to alter a building in connection the installation of P&M is treated as expenditure on P&M by s. 25 .

Is it saved from exclusion?

Section 23 limits the wide exclusions described above by providing that s. 21(1) and 22(1) do not apply to:

(1)expenditure to which any of the provisions listed by s. 23(2) apply. These include:
(a) s. 28 : thermal insulation of buildings;
(b) s. 33 : personal security; and
(c) s. 33A : integral features; and
(2)expenditure on any item in the 33 categories in list C in s. 23(4) .

In Urenco Chemplants Ltd, the Court of Appeal considered whether (2) above saved expenditure on P&M (as stated in the legislation), or expenditure on the provision of P&M (i.e. echoing the wording of the general condition in s. 11 ). If the former was correct, it would be possible to claim CAs on the cost of the plant but not on ancillary costs such as the transport costs. The Court of Appeal found that this could not have been Parliament’s intention, and that ‘something must have gone wrong in the drafting’ of List C as part of the Tax Law Rewrite Project. The question has been remitted to the FTT for reconsideration, with the FTT required to consider List C as ‘correctly construed’ to allow for the latter interpretation.

The meaning of ‘on the provision of’ P&M was considered by the First-tier Tribunal in Gunfleet Sands Ltd. HMRC had rejected a claim for CAs relating to design expenditure incurred in relation to P&M on the basis that it was too remote to have been incurred on the provision of the P&M. Having drawn a distinction between expenditure on design which it is necessary to incur for the P&M to function (‘necessary design’) and other expenditure on design (‘unnecessary design’), the FTT concluded that expenditure on ‘necessary design’ qualified for CAs.

Conclusion

This remains a challenging area, combining the common law test for ‘plant’ with legislation that is, at best, difficult to apply. Some comfort may be taken in the fact that, since October 2018, expenditure on a building or structure that is not eligible for P&M CAs may meet the conditions for the structures and buildings allowance.

Useful links

For commentary on CAs for P&M, see Quick Link.

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