The recent case of Inmarsat Global Limited v The Commissioners for Her Majesty’s Revenue & Customs [2021] UKUT0059(TCC) is an appeal against a decision of the First-tier tribunal (FTT) that expenditure on the cost of launching six satellites between 1990 and 1996 was not eligible for capital allowances.
It was not disputed that had the company constructed and operated the satellites the associated launch costs would qualify for plant and machinery allowances under the ‘provision of plant and machinery’.
The challenge here was that the company incurring the launch costs (which the claimant wanted to base its claim on using the succession in trade principles) did not actually own any of the satellites at the time the expenditure was incurred and as entitlement to plant and machinery allowances ("PMAs") depends on ownership (as defined within the Capital Allowances Acts (‘CAA’)) their claim failed.
This case highlights the importance of considering tax at the inception of a deal and what used to be possible in older tax-based leasing arrangements. Whilst the taxpayer lost the appeal, Upper Tribunal (“UT”) agreed with some of the other arguments put forward, in particular the meaning of the terms “required” and “provision”, which are still used in the CAA legislation today.
Transaction Background
It is worth noting that the company (“IMSO”) which initiated the original deal to construct and launch the satellites was exempt from income and gains by a Statutory Order and it was only after the original deal for construction was struck were the tax inefficiencies of having a non-tax paying body incurring lots of ‘capital allowances eligible’ really considered.
This resulted in the construction contracts being novated to tax paying Lessors who could, back then*, benefit from the significant plant and machinery allowances available. Crucially, the launch costs did not form part of the satellite construction contracts and were left with IMSO to deal with.
IMSO’s business and assets was subsequently acquired through a share deal by International Maritime Satellite Organisation (“Inmarsat”) and Inmarsat wanted to use the succession provisions (CAA 1990 s78 now CAA 2001 s265) to ‘walk into its shoes’ of IMSO for capital allowances purposes and therein potentially inherit any outstanding PMAs claim for the launch costs.
* Tax based leasing arrangements fell out of favour with the government and HM Revenue & Customs (“HMRC”) in the late 1990’s/early 2000’s and the Lessors under the above would now be caught by the ‘long funding lease’ rules introduced from April 2006 and have to consider other anti-avoidance (e.g., DOTAS and GAAR) such that a similar leasing arrangement written today would have a very different tax profile.
Ownership and Belonging
A basic condition (CAA 1990 s24(1)b) for claiming PMAs is that as a consequence of incurring the expenditure the qualifying assets must ‘belong’ to the claimant involved.
The parties agreed that the conditions to fall within the succession provisions were met and Inmarsat argued that since s78 deems the Satellites to have been “sold” to Inmarsat, it necessarily follows from that deeming that they “belong” to it, so that Inmarsat can obtain allowances under s24.
Upper Tribunal (UT) rejected this argument and agreed with FTT in that s78 is not concerned with the capital allowances ownership position of the predecessor but in the computational aspect of claim once it has been made. The fact an asset is ‘sold’ and is deemed to belong to the new owner does not create a new belonging to that which was not there before or after the deal.
This meant Inmarsat’s claim failed on first principles and whilst it was not thereafter necessary to consider whether any of the actual launch expenditure could actually qualify for allowances, UT went onto consider this point.
Provision of Plant and Machinery
Everyone accepted that the launch costs that IMSO incurred were capital expenditure and that the Satellites were operating and “plant” in relation to IMSO’s trade. The issue was whether the launch costs were on “the provision for the purposes of a trade … of machinery or plant” within CAA 1990 s61(4) [now CAA 2001 s70 etc.] – which deals with special situations for expenditure incurred with machinery and plant on lease.
HMRC argued that the launch costs were ‘free-standing’ in that without ownership of the satellites themselves IMSO could not be regarded as having incurred expenditure on the ‘provision’ of PMAs. To conclude otherwise would result in “two persons treated as full owners of a single asset and able to claim allowances on it”.
UT rejected this approach not least because neither IMSO nor the Satellite owners would be entitled to claim PMAs on assets that they had not incurred any capital expenditure on. The key point was to focus on the nature and purpose of the expenditure for the purposes of s61(4) and not the business incurring it. Had IMSO owned the satellites the costs would have been readily accepted as ‘on the provision of’ plant and machinery and this was not altered by s61.
Requirement to Provide Plant or Machinery
This deals with the technical operation of s61(4) and specifically when ‘machinery or plant which he is required to provide under the terms of the lease’.
HMRC argued that in the absence of specific reference for the requirement to launch the satellites in the lease documentation when the leases were signed precludes IMSO from satisfying this test. UT disagreed and accepted the argument that IMSO would be in breach of contract had it not launched the satellites and that s61(4) makes no stipulation as to the
point in time at which the requirement must come into existence.
Conclusion
This case provides useful commentary on the interpretation of certain terminology “provision” and “required” that remains relevant today and if you would like further details, please do not hesitate to contact us.