The case of Revenue and Customs Commissioners v SSE Generation Ltd [2021] will be of interest to anyone involved in capital allowances because it discusses in some detail the application and principles behind the statutory ‘structure’ exclusions contained in the Capital Allowances Act (‘CAA’) 2001 s22 and its potential exemptions in CAA 2001 s23 – List C.
More specifically, how narrowly some of the terms in s22 need to be construed and applied as well as what needs to be considered for claims under s23 that wish to rely on “alterations of land for the purpose only of installing plant or machinery” and “the provision of pipelines or underground ducts or tunnels with a primary purpose of carrying utility conduits”.
The tactics and arguments used by HMRC in defending their interpretation of the above are not unique to the case of SSE and consequently, this case (along with its preceding judgements) has the potential to have wider implications.
Following this latest ruling in the Court of Appeal, SSE Generation Ltd (‘SSE’) is set to largely maintain its original capital allowances claim for its £300m Glendoe Hydro Electric Power Scheme near Fort Augustus above Loch Ness in the Highlands of Scotland which was completed over 10 years ago.
Case Background
HMRC issued closure notices to SSE for the tax years ending 31 March 2006 to 31 March 2012 after failing to reach an agreement with SSE. They concluded that SSE's profits had been understated in those years as a result of the capital allowances claims made by SSE under Part 2 of the CAA 2001.
SSE appealed against the notices to the First-tier Tribunal (Tax Chamber) (‘FTT') and FTT decided that SSE was entitled to claim allowances for some of the disputed items but upheld HMRC's view on others (see original case article).
HMRC then lodged an appeal before the Upper Tribunal (UT) in respect of some of the items which the FTT had found did give rise to allowable expenditure. The UT disagreed with the FTT's analysis in certain respects and remade the decision largely in SSE's favour (see article). The UT granted permission for HMRC to appeal this decision on 23 December 2019 and it is this latest appeal which is discussed here.
Structures, assets and works
Qualifying expenditure for plant and machinery allowances (PMA’) is defined by a general rule (CAA 2001 s11) to which there are various exceptions. Expenditure is 'qualifying expenditure' if it is spent on plant or machinery, wholly or partly, incurred for the purpose of a qualifying activity.
All parties accepted that the items in dispute counted as ‘plant’ and fell within the above general rule; so, the issue at stake was whether the items involved were taken out of the general rule by one of the exceptions.
The key exception in this case is s22(1) which states that “expenditure on the provision of plant or machinery does not include expenditure on: (a) the provision of a structure or other asset in list B, or (b) any works involving the alteration of land”.
List B sets out seven groups of items - Item 1 includes tunnels and aqueducts (two of the key terms in dispute) meaning potentially no PMAs would be available if caught. However, Item 7 of List B contains a ‘sweep-up’ item that brings within List B all structures not covered by Items 1 to 6. However, this is subject to a further carve out for "industrial buildings" which the parties agreed would apply if the expenditure did not fall within Item 1.
Another important issue in the appeal is the relationship between s 22(1)(a) and (b). HMRC argued that they overlapped and that if, despite being a structure, the plant is not excluded from the general rule by s22(1)(a), one must then go on and consider whether it fails s 22(1)(b) and is disallowed via that route.
If the expenditure is caught by s22(1) it will only be eligible for PMAs if it falls within the narrow exemptions contained in s23 – List C which were identified as Item 22 “the alteration of land for the purpose only of installing plant or machinery” and Item 25 “the provision of pipelines or underground ducts or tunnels with a primary purpose of carrying utility conduits”.
The relationship between s22(1)(a) and (b)
One of the difficulties with HMRC’s interpretation of s22(1)(b) is that it would cancel out most of List B. Indeed, there was much discussion and commentary which stated “it was difficult to conceive of the construction of a structure which was an industrial building, but which did not involve any alteration of the land. It was also, therefore, difficult to see what purpose List B served if HMRC's interpretation of the provisions was correct”.
The Court of Appeal agreed with the UT that the two limbs of section 22(1) were mutually exclusive. This meant that if the expenditure was allowable in s22(1)(a) one would not need to go on to consider any alternative exclusion in s22(1)(b).
When a Tunnel is not a Tunnel
Just because someone refers to a tunnel or aqueduct in the course of describing a work element does not make it a tunnel or aqueduct for the purposes of CAA 2001 s22(1) – Item 1.
The most relevant OED definition of the word 'tunnel' is "a subterranean passage; a road-way excavated underground, esp. under a hill or mountain, or beneath the bed of a river: now most commonly on a railway; also, in earliest use on a canal, in a mine etc”.
Noscitura A Socis is a Latin phrase that literally means “it is known from its associates” and is an interpretive legal tool to help establish the meaning or construction of words in legal statute whose meaning is uncertain, questionable or doubtful.
In the context of ‘tunnel’, UT stated..
" … in our view the words immediately surrounding "tunnel" in Item 1 of List B are "bridge, viaduct, aqueduct, embankment or cutting" all of which are the product of civil engineering works related to the construction of transportation ways and routes, that is the types of ways and routes which the draftsman subsequently lists in Item 2 and 3 of List B. It follows therefore that the context requires that the word "tunnel" should be given a narrower meaning than its ordinary dictionary meaning."
UT concluded that in this context, the word ‘tunnel’ had a narrower meaning than its ordinary meaning for the purposes of s22(1) – List B and the Court of Appeal agreed.
What is an Aqueduct
FTT considered the meaning of 'aqueduct' when applying the provisions to the drilled and blasted conduits. Judge Poole noted that there were two OED definitions of the word. It can mean "an artificial channel for the conveyance of water from place to place; a conduit; esp. an elevated structure of masonry used for this purpose" or it can mean "The similar structure by which a canal is carried over a river etc."
He held, "the better view to be that in the context of List B, the word "aqueduct" is apt to describe an asset of the type we are here concerned with – an artificial underground conduit whose function is solely to transport water from one place to another through the ground under the force of gravity; I consider the transportation of water itself is enough to be consistent with the overall "transportation" theme of Item 1, rather than requiring the water to be the means of transportation of other things (as in the case of a canal)."
The UT considered the meaning of 'aqueduct'. They agreed with FTT that the word had two potential ordinary meanings according to the OED, one broader and one narrower. However, the Upper Tribunal held that the transportation theme of List B Item 1 meant that the second meaning was the one intended here. The FTT had erred in holding that the fact that some of the items in dispute in the appeal moved water from place to place was enough to make them aqueducts. The UT confined the term aqueduct to a bridge-like structure which created a transportation route in the form of a canal.
The Court of Appeal debated this point and eventually agreed with the UT noting that the ordinary definition could in fact be wider (albeit differently to FTT) but concluded “in its context here, an aqueduct is a bridge or viaduct-like structure which carries a canal.”
Conduits, Headrace and Tailrace
The importance of what a Tunnel or Aqueduct is in this case is that it is these exclusion categories HMRC sought to have certain work elements fall within by the application of a wider meaning. Doing so would trigger s22(1) and the need for SSE to satisfy the much stricter provisions of s23 – List C.
None of the conduits in dispute (‘drill and blast’, ‘cut and cover’ or open channels) were tunnels because they were not intended to be used for the passage of people or transport. They were also not aqueducts (in the same way as the headrace and tailrace). They were all structures neither covered by s22(1)(b) or caught by List B Item 7 because they are ‘industrial buildings’.
The Court of Appeal upheld the UT decision and rejected HMRC’s appeal. It also did so by commenting on and supporting the grounds of the decisions made by the UT in overturning some of the original decisions made by FTT.
If you would like to learn more about this case or discuss how it might benefit your business, please do not hesitate to contact us.