SSE Generation – UT considers the meaning of structure for the purposes of capital allowances

In HMRC v SSE Generation Ltd [2019] UKUT 332 (TCC), the Upper Tribunal (UT) has dismissed HMRC's appeal against the decision of the First-tier Tribunal (FTT) that the taxpayer was eligible for capital allowances in relation to certain expenditure it incurred in connection with the construction of the Glendoe Hydro Electric Power Scheme.

Background

SSE Generation Ltd (SSEG) claimed capital allowances in respect of £260 million of fixed asset expenditure in relation to the Glendoe Hydro Electric Power Scheme. HMRC accepted only £34 million of the claim and issued various closure notices to SSEG denying the remainder of SSEG's capital allowances claims in respect of the years ending 31 March 2006 to 31 March 2012, inclusive. SSEG appealed the closure notices.

The dispute related to works of civil engineering which enabled water to be taken into and from a dammed area and channelled under high pressure to the turbine to generate electricity, and for the used water to be discharged into Loch Ness. SSEG contended that the relevant assets were "plant" and that the relevant expenditure was expenditure "on the provision of plant", for the purposes of Part 2, Capital Allowances Act 2001 (CAA 2001).

FTT decision

The FTT decided that the expenditure incurred by SSEG on a considerable number of the relevant items was allowable, but that the expenditure on some of the items was not allowable. HMRC appealed to the UT against the FTT's findings in respect of the most substantial items.

UT decision

HMRC's appeal was dismissed.

It was common ground that:
(a) the expenditure in dispute was "qualifying expenditure" unless excluded by Chapter 3, Part 2, CAA 2001; and
(b) the expenditure was "on the provision of plant".

Section 22, CAA 2001, excludes from expenditure on the provision of plant and machinery, expenditure on (a) the provision of a structure or other asset in list B in section 22 (List B) (section 22(1)(a)), or (b) any works involving the alteration of land (section 22(1)(b)). Section 23 provides that sections 21 and 22 do not affect the question of whether expenditure on any item described in list C in section 23 (List C) is expenditure on the provision of plant or machinery.

The UT concluded that section 22(1)(a) and section 22(1)(b) are mutually exclusive and as a consequence a structure cannot fall within the scope of both provisions. The UT was of the view that the scope of section 22(1)(b) is limited to items of plant which result from works on the land without the creation of a "structure" or other similar asset and section 22(1)(b) applies where the alteration of land is the objective in its own right.

SSEG incurred expenditure on the provision of a structure which was not excluded by the operation of List B because it was an 'industrial building' saved by Item 7(a) of List B. The UT's conclusion meant that expenditure incurred on the construction of the industrial building, which entailed expenditure on works "involving the alteration of land", was not excluded by section 22(1)(b), and was therefore eligible for capital allowances.

The UT also concluded that the exception in Item 22 of List C for expenditure on the alteration of land for the purpose only of installing plant or machinery would apply where the relevant "plant" was excluded from allowances by virtue of being an Item in List B.

Comment

In contrast to many tax cases, this decision is an example of a purposive approach to legislation resulting in a decision which was favourable to the taxpayer. The UT narrowly interpreted the exceptions to the availability of capital allowances, which resulted in HMRC's appeal being dismissed.

The UT's conclusions in relation to (i) the interaction between section 22(1)(a) and section 22(1)(b), and (ii) the interaction between List B and Item 22 in List C, provide helpful clarification on the application of Chapter 3, Part 2, CAA 2001. However, in relation to the latter, the UT's conclusions will be of limited relevance, due to an amendment made by  Finance Act 2019 to section 22(4), which applies to claims for capital allowances made on or after 29 October 2018.

In addition to these conclusions, which are of broad relevance, the decision also clarifies the meanings of "tunnel" and "aqueduct" (as used in List B), and "installation" and "pipeline" as used in List C. This will be of assistance to other taxpayers. It is understood that HMRC are seeking permission to appeal the decision to the Court of Appeal.

A copy of the decision can be viewed here.