Building used for manufacturing with specialist elements
Despite the complexity needed to operate a depleted uranium hexafluoride treatment facility; and specifically, the specialist building parts needed. The taxpayer lost its £192m claim for capital allowances on some key elements.
It is no secret that HM Revenue & Customs (“HMRC”) does not like claims for plant and machinery allowances (“PMAs”) on parts of buildings or structures and case law has evolved (along with statute) to largely support this aim.
In the case of Urenco v HM Revenue & Customs [2019] UKFTT 0522 (TC), First Tier Tribunal (“FTT”) considered the taxpayers (“Urenco”) claim for specialist floors, plinths, walls, steel supports, stairs and access platforms in a depleted uranium hexafluoride (Tails) processing facility. The assets were all designed to perform an essential operational function and meet regulatory requirements quite unique compared to other industry sectors.
FTT ruled that even although some of the assets had the potential to function as plant they were all ‘incorporated in or connected with the buildings’ and therefore, caught by the statutory exclusion.
What is interesting about this case is:
The interpretation of what costs can reasonably be incurred ‘on the provision of’ accepted plant or machinery and the application of statute;
The potential impact for related claims in other manufacturing and processing sites.
Whilst the decision reinforces established capital allowances principles it does appear to narrow the potential for ancillary building costs associated with plant or machinery. At a time when the government wishes to boost such investment as part of its Industrial Strategy there will be many disappointed in the above.
What are TAILs?
Tails are a by-product of the uranium enrichment process (needed for nuclear power) and the Tails Management Facility (“TMF”) is licensed to “deconvert” the Tails and make storage safer.
The various structures and their components are all specifically and uniquely designed to ensure that radiation dosages to employees, visitors, members of the public and the environment are minimised.
From the outside the various facilities comprising the TMF give the appearance of a single modern industrial type building albeit with different roof heights. The Cylinder Handling Facility (“CHF”) and the Uranium Oxide Store (“UOS”) give the appearance of being large warehouse type structures. This is the effect in part of the external cladding (which can be removed and replaced).
It was a condition of the planning permission that the facilities have the appearance of a modern business park. The site is very close to local community facilities. Despite appearances, each of the facilities under consideration is structurally independent.
What was being disputed?
Construction of the TMF was substantially completed in the late summer of 2018. The total cost of the project was c.£1bn. The treatment for capital allowance purposes of most of that expenditure was agreed and the FTT decision was over the eligibility of c.£192m which Urenco had claimed and HMRC disputed.
Complex manufacturing sites with significant elements of process plant and machinery housed in different facilities will often need to have each facility considered separately for capital allowances purposes and the current case is no different. The taxpayer identified various “Safety Significant Structures” (i.e. readily identifiable assets capable of independent existence) which FTT broadly agreed with for discussion.
These Safety Significant Structures (“SSS”) contained the essential processing plant and equipment and the various items in dispute (i.e. specialist floors, plinths, walls, steel supports, stairs and access platforms). These included a Cylinder Handling Facility (“CHF”), Tails Deconversion Plant (“TDP”) and Uranium Oxide Store (“UOS”).
Why was the claim challenged?
The Capital Allowances Act (“CAA”) 2001 has evolved over the years to limit plant and machinery allowances (“PMAs”) on buildings or structures and it achieves this via statutory exclusions. The most restrictive provision applies to buildings and FTT ruled that all the SSS were in fact buildings.
If you fall into either statutory exclusion you can only get out of it if your expenditure is on a type of plant or machinery (“P&M”) listed in CAA 2001; or an ‘integral feature’. Therefore, the case hinged on the technical application of expenditure on the P&M listed and exempted from the general building exclusion.
Urenco argued that expenditure on the P&M listed should include the cost of expenditure ‘on the provision of the plant or machinery’ (i.e. the cost of installation/support/operation etc).
Whereas, HMRC argued that the purpose of the P&M List was to save qualifying expenditure to its actual cost (i.e. you should ignore such related expenditure) and FTT agreed.
In reaching the conclusion, FTT also considered the eligibility of the disputed items as P&M on a first principles basis and concluded that both the kiln and condenser facility could functions as plant.
Had Urenco successfully argued that the SSS were Structures (as opposed to buildings) a case may have succeeded in part for these elements.
FTT ruled that none of the disputed expenditure could be regarded as “the alteration of land for the purposes only of installing plant or machinery”.
Conclusion
Whilst the decision reinforces some well established capital allowances principles it does appear to narrow the potential for ancillary building costs associated with plant or machinery.
This will inevitably, if unchallenged, lead to further disputes on related items (e.g. access/inspection stairs/gantries and plinths) installed in other complex manufacturing sites.
Affected businesses ( e.g. those involved in food or drink production, car manufacturing etc) may need to review their claims accordingly.
At a time when we need ordinary building design to become more innovative through efficiency in incorporating better energy and production waste systems there will be many disappointed in the above.
If you have any questions or would like to discuss how the decision could affect your business, please do not hesitate to get in touch.