Can a hole in the ground be an item of plant or machinery? The hole here was in fact a sophisticated underground cavern which had been artificially created by dissolving rock salt and then forcing the water out to be replaced by gas, which was held for storage.
The capital allowances rules for ‘plant and machinery’ generally distinguish between items which are used in a trade (qualifying) and the setting in which the trade is carried out (non-qualifying). But the distinction is not hard and fast and sometimes the setting itself can qualify as ‘plant’ for use in the trade.
That was the crux of the dispute in the recent case of Cheshire Cavity Storage 1 Ltd and another v Revenue and Customs Commissioners [2021] UKUT 50 (TCC). Were these caverns or caves merely the place where gas was stored, or were they in effect a giant item of ‘plant’ for the management of gas?
First-tier tribunal (FTT) had found against the company and the Upper tribunal agreed.
Case Background
The appeals concern the availability of plant and machinery allowances under the Capital Allowance Act 2001 (“CAA 2001”) for expenditure incurred in relation to underground cavities for gas storage in Cheshire.
The cavities are formed by injecting water into naturally occurring salt rock beneath the ground which, when the salt rock dissolves, leaves a hole filled with saltwater. Gas is then pumped into the hole and the saltwater in it is expelled. The rock all around the hole creates a barrier so the gas cannot escape. The cavity is connected by pipes to the national transmission system (NTS) for gas, which is owned by National Grid, and which supplies gas to end users.
A single cavity can hold the same as about 300 gasometers (the large blue coloured cylindrical containers, now disused but a familiar feature in many towns) and are considered safer as they hold the gas underground. Gasometers would normally qualify as ‘plant’ so why not the costs of creating the underground storage cavities performing a similar function?
Meaning of ‘plant’
Although parts of CAA 2001 tell you what you can claim as plant (e.g., ‘integral features’) its primary design is to restrict what ‘plant’ means for the purposes of capital allowances. This is deliberate because what the Courts decide what ‘plant’ means in ordinary law can be wider than what the government wishes to provide tax relief on.
CAA 2001 is therefore an amalgamation of historical case law and legislation that is designed to draw a line on what ‘plant’ qualifies for allowances and provide a degree of certainty for both taxpayers and HM Revenue & Customs (HMRC).
If the underground caverns were not capable of being ‘plant’ using first principles, there was no point in examining the arguments and application of CAA 2001 any further.
Case law evolution
In this case, Upper tribunal took a back-to-basics approach and re-examined some of the key decisions which have determined ‘plant’ status over the years and their summary principles are set out below: -
The starting point is that plant is the apparatus used for the carrying on of a business [Yarmouth v France (1887) 19 QBD 64].
The question is whether the item is part of the premises in which the business is carried on or part of the plant with which the business is carried on. Even though premises are usually to be regarded as the setting in which the trade is carried out and therefore not plant, premises and plant are not mutually exclusive, and each case depends on its own circumstances. There can be cases where an item is excluded from being plant on the basis that it is more part of the setting than part of the apparatus for carrying on the trade [Jarrold (Inspector of Taxes) v John Good & Sons Ltd [1963] 1 WLR 214].
The function of an item is an important consideration. The functional test is a preliminary to the assessment of whether a particular item is apparatus. A structure can also be plant if it fulfils the function of plant in a trader’s operations, but not every structure which fulfils the function of plant must be regarded as plant if there is a good reason to exclude such a structure [IRC v Barclay, Curle & Co. Ltd. (1969) 1 All ER 732, Benson (Inspector of Taxes) v Yard Arm Club Ltd [1979] STC 266].
A decision on whether or not an item is plant is a decision on a question of fact and degree and there are cases which on the facts found are capable of being decided either way. It is too stark a distinction to draw a contrast between a structure which is the means by which business activities are in part carried on with a structure which plays no part in the carrying on of those activities but is merely the place within which they are carried on [Schofield (Inspector of Taxes) v R & H Hall Ltd [1975] STC 353, Attwood v Anduff Car Wash Ltd [1997] STC 1167].
Although a building in which a business is carried on can accurately be described as being provided for the purposes of the business it is not for that reason alone to be held to be plant [Benson (Inspector of Taxes) v Yard Arm Club Ltd].
Where premises also perform a plant-like function the question is whether it is more appropriate to describe the item as having become part of the premises rather than as having retained a separate identity. If the item functions as part of the premises it is not plant [Wimpy International Ltd v Warland (Inspector of Taxes) [1989] STC 273, Bradley (Inspector of Taxes) v London Electricity [1996] STC 450].
Equipment does not cease to be plant merely because it discharges an additional function such as providing the place in which the business is carried on [Carr (Inspector of Taxes) v Sayer [1992] STC 396].
The question in each case is whether the item functions as premises or plant. To answer this may involve deciding whether it is more appropriate to describe the item as apparatus for carrying on the business or as the premises in or upon which the business is conducted [Wimpy International Ltd v Warland (Inspector of Taxes) [1989] STC 273, Attwood v Anduff Car Wash Ltd [1997] STC 1167)].
Functioning Premises as Plant
The taxpayer argued that the cavities had a plant-like function and therefore must fall within the definition of ‘plant’ whereas HMRC argued that just because the assets may have some plant-like function it was insufficient to outweigh its premises nature. It comes down to a question of fact and degree as to which of the functions predominate and the decision highlights lots of discussions on this point.
In the end, FTT concluded that because the company did not use, distribute, or process the gas the cavities predominate function was that of storage (a premises like function). The cavities themselves were like giant ‘tear drops’ once all the salt and brine had been removed and did nothing else but provide safe underground storage for release when gas prices were at their optimum – “the cavities were just very good premises for storing gas” and the Upper Tribunal agreed.
Conclusion
HMRC consistently challenges premises claims for ‘plant’ and this decision reinforces the bar needed to demonstrate the very active like function that must be met for a claim to succeed. It also provides a useful summary of case law in reaching its decision.
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