This is a case for Industrial Buildings Allowances (IBAs). IBAs were phased out from 2007 onwards so the decision is largely of historical interest although it was north noting that it is not uncommon for legal titles for properties in former Enterprise Zones to have conditions within them for the occupants to keep the buildings in commercial use arising from some of the IBA clawback provisions discussed in this decision.
The issue facing Upper Tribunal (UT) was what seems to be a simple point: can a building said to have been temporarily out of use as an industrial building if it is never in fact brought back into use? First-tier Tribunal (FTT) said no, but the Upper Tribunal has now reversed that decision.
This was a notable victory for the taxpayer as some £13m of tax allowances depended almost entirely on the true meaning of the word temporary.
FTT rejected TAL CPT Land Development Partnership LLP’s (“TALs”) claim that the commercial buildings it acquired from Chunghwa Picture Tubes (UK) Ltd (“CPT”) in 2004 were ever in ‘temporary disuse’ during its period of ownership and further details on that decision can be found here.
There was no dispute that the building had met the tests to be a qualifying industrial building when it was used by CPT (for manufacturing cathode ray television tubes) but it had last been used for such a purpose in January 2003 and despite its best endeavours, TAL had been unable to let or meaningfully use the property since its acquisition.
Both HMRC and FTT agreed that if a building falls ‘temporarily’ out of use, it remains so until it comes back into an actual physical state of ‘use’ with reference to objective facts. If it never comes back into actual use, then the period cannot be considered to be ‘temporary’.
The impact of this decision is that CPT would likely suffer a clawback of some IBAs claimed (indeed they obtained a tax warranty from TAL to cover this potential eventuality) and TAL’s claim for IBAs would be invalid. Given that CPT was dissolved on 26 November 2015, TAL and its investors would now be the main losers.
Intentions and Actions Matter
Crucially in this case was the actual actions and intentions of TAL. It had gone to great lengths to let the property and could prove this. HM Revenue & Customs (“HMRC”) had also even recognised the period of ‘temporary disuse’ of around 13 months before TALs acquisition in 2004 in its correspondence with TAL.
UT disagreed that with the argument that a change in owner (and balancing event rules for sales) would interrupt the legislation which deals with a period of ‘temporary disuse’. It is the status of the property that matters and not that of the taxpayer owner. Interestingly, this argument was also at direct odds with HMRC’s own manuals (CA32800) – “A period of disuse can be protected by the Section 285 legislation if the next period of use is by the next owner of the relevant interest” which was raised by TAL but not used by UT.
UT concluded that FTT erred in law by determining that the taxpayer’s intention was not a relevant factor in the application of ‘temporary disuse’. UT also concluded that FTT was wrong to determine that the application of the ‘temporary disuse’ provision would change by reference to events and subsequent chargeable periods. The appeal was allowed.
If you have questions on this, or related tax matters, we will be delighted to hear from you.