Subject to limited exceptions, buildings or structures do not normally qualify for plant and machinery allowances and whenever a taxpayer seeks to make such claim, they should expect it to come under HM Revenue & Customs scrutiny (HMRC) and be challenged accordingly. Where the treatment is unusual or unclear, a cat and mouse game can ensue with HMRC arguing a prescriptive and narrow interpretation of the limited exceptions available.
This case concerns the treatment of a £319,483 warehouse designed and operated as a potato storage facility in the accounting period ended 31 March 2015. The taxpayer argued that the entire warehouse was plant because it met at least two of the exception conditions; namely, it functioned as a cold store, and it also functioned as a silo providing temporary storage – either one would be enough to win, and the First-Tier Tribunal (FTT) found in favour on both.
It is worth noting that the building in this case was no ordinary warehouse. It cost five or six times more than a standard warehouse of a similar size and contained several specialist features to enable the potatoes to be stored correctly in the British climate – taken as a whole it was a single large and complex piece of kit.
Case Background
When you buy a packet of crisps, how much do you think about the process which turns potatoes into a snack? If you have ever wondered, this decision is the place to start. There is a lot of detail about how potatoes are stored to meet the year-round demand from major crisp manufacturers. From initial skin drying to meet target moisture contents, relative humidity levels and ambient temperature control depending on the potato variety involved.
The company’s largest customer pays a base price for each ton of potato, but it also gives it a bonus linked to the level of defects within each ton. At the upper ends this bonus can represent some 67% of the company’s profit so getting the storage conditions right is critical to its profitability and success.
The warehouse was constructed using a steel load bearing frame on concrete foundations with composite roof and wall cladding and roller shutter door access. From the outside at least, it looks like an ordinary commercial warehouse. Inside however, it contains additional concrete linings/walls for storage, has a Dutch designed concrete room which functions as a plenum/air mixing chamber with holes/vents and computerised controls for optimum air flow. The air is passed through floor ducts and vents to ensure the potatoes receive the right conditions from the bottom to the top of each storage pile.
HMRC raised an enquiry on 10 June 2016 into the company’s tax return which resulted in a closure notice on 28 November 2018 rejecting the plant and machinery allowances claim for the warehouse store as plant. The company appealed to Tax Tribunal on 11 June 2019 with the hearing finally taking place on 10 February 2021
Building and Structures as Plant
Most claims for buildings as plant fail because they are simply the premises, or setting, upon which the claimant carries on its trade and there is a long history of tax disputes to prove this point. However, in rare cases, the functional use and design of the building goes beyond the mere setting to become the ‘apparatus’ used for carrying on the business and this is what FTT concluded here.
The taxpayer relied on a number of cases but one notable recent case mentioned was for the grain silo decision in May & Another v HMRC [2019] UKFTT 32 (TC) which also found in favour of the taxpayer – this also dealt with an above ground building qualifying as a ‘silo provided for temporary storage’.
Silos as plant
Much like the May decision above, this decision rests on the fact there is no definition of a silo in the capital allowances legislation, and it must therefore take its ordinary meaning. There is also no definition on what is meant by ‘temporary’ such that the storage could be for a matter of days or months – the key is that the potatoes were intended to be removed and moved in practice.
FTT did not accept HMRCs view that the Oxford English Dictionary meaning of a Silo “a pit or underground chamber used for storing grain, roots, etc; one in which green crops are compressed and preserved for fodder as silage. Also, a cylindrical tower or other structure built above ground for the same purpose. “should be so narrowly construed so as to limit potatoes falling into the category of etc. – it was an above ground structure built for the same purpose.
Given that HMRC did not appeal the May decision on this point this is going to be a difficult point to overturn without an alternate approach and we await to see what HMRC decide to do on this point.
Cold Stores as Plant
Although the building was not refrigerated, it was kept at a temperature of between 6 and 11 degrees with design and regulated controls to achieve this aim. In the view of the tribunal, that was sufficiently cold.
Most claims for cold stores in a warehouse are on a piecemeal basis either on the refrigerated boxes within them or the insulation/refrigeration components installed. Only in rare cases where the qualifying parts become so intricated into the structural fabric of the building itself is a claim for the whole building normally possible (see HMRC manuals CA22120).
Crucial in this decision is the absence of any mechanical refrigeration which given HMRC’s known approach to other claims for cold stores is likely to raise a few eyebrows. This is perhaps the more contentious point, and if HMRC decide to appeal, this is probably the area they will likely focus on, but to succeed they will need to overturn both the ‘silo’ and ‘cold store’ decisions for plant treatment.
If you have an unusual or complex building project and want to understand how much of it could attract capital allowances in light of the above and related decisions, please contact us.