When is a 'tunnel' not a tunnel, for capital allowances purposes?

07 June 2023. Published by Harry Smith, Senior Associate

In HMRC v SSE Generation Ltd [2023] UKSC 17, the Supreme Court confirmed that capital allowances are available in respect of parts of a hydroelectric power station.

This blog post is based on an article originally prepared for LexisPSL.


The dispute in this case concerned the availability of capital allowances in respect of the Glendoe scheme, a large hydroelectric project at Fort Augustus, in Scotland, which was constructed and operated by SSE Generation Ltd (SSE). 

Construction started in 2006.  The project was briefly opened in 2009 before a major rockfall necessitated further works from 2010 until 2012, after which the scheme became fully operational.  Electricity is generated by using water at high pressure drawn from a dammed area to drive a water turbine.  This, in turn, engages the generator, and the water is discharged into Loch Ness.  

SSE claimed capital allowances in respect of various items of plant and machinery associated with the project, in particular:

1. conduits used to gather and convey water to the reservoir, including a drilled and blasted underground conduit lined with shotcrete, a cut-and-cover conduit and uncovered channels lined with rocks or concrete;
2. the headrace, providing pressurised water to the generating equipment;
3. the tailrace, releasing spent water into Loch Ness;
4. the turbine outflow tunnel, joining the outflow of the turbine to the tailrace; and 
5. dewatering and drainage tunnels.

Many of the assets are sited underground, which both optimises water pressure and minimises the cost and environmental impact of the scheme.  


Section 11, Capital Allowances Act 2001 (CAA), provides that plant and machinery allowances are available on capital expenditure on the provision of plant for the purposes of a qualifying activity, subject to rules set out in sections 21-38, CAA.   It was not in dispute that the capital expenditure had been incurred by SSE for the purposes of its trade (which was a qualifying activity).  

However, section 22, CAA, provides that 'expenditure on the provision of plant or machinery does not include expenditure on (a) the provision of a structure or other asset in list B, or (b) any works involving the alteration of land'.  List B excludes (amongst other things) at item 1 'a tunnel, bridge, viaduct, aqueduct, embankment or cutting'.  It was common ground that a further 'sweeper' exclusion in List B did not apply and therefore, to the extent that any disputed item was not a 'tunnel' or an 'aqueduct' within List B, capital allowances would be available to SSE with respect to the expenditure it had incurred.


The respondent's appeals against the denial of the capital allowances had been upheld at least in part by all lower tribunals and courts.  The First-tier Tribunal (FTT), Upper Tribunal (UT) and Court of Appeal (CA), had all held that none of the disputed items was a 'tunnel' for the purposes of section 22, although their reasoning had differed.  The FTT had held that some of the items constituted 'aqueducts', but this decision was overturned by the UT, with which the CA agreed.  HMRC appealed to the SC.

SC judgment

HMRC's appeal was dismissed.

The SC adopted a contextual approach to the interpretation of the words used in List B.  In its view, 'tunnel', in the context of a list of structures related to the construction of transportation routes or ways, meant 'a subterranean passage for a way to pass through'. 'Aqueduct', in its context, did not simply mean any conduit to carry water as that meaning would render otiose the inclusion of other specifically-listed water conduits (such as canals, dikes and drainage ditches), and it would also be 'very surprising' for it to be listed after 'bridge, viaduct'.  In context, the word 'aqueduct' meant 'a bridge-like structure for carrying water', including but not limited to carrying a canal.  

On the facts, this meant that the parts of the hydro-electric project in relation to which the dispute over the availability of capital allowances had arisen were not, respectively, a 'tunnel' or an 'aqueduct'.  As this was the only point of dispute between the parties, the result was that capital allowances were available with respect to the expenditure.


The approach to statutory construction endorsed by the SC – that the context in which words are used is an important guide to the meaning they are intended to bear – does not seem revolutionary to the casual observer.  After all, it is the approach that most people adopt in day-to-day English usage.   While the SC has previously rejected the idea that there is a dichotomy between textualism and contextualism in the context of contractual interpretation (see Wood v Capital Insurance Services Ltd [2017] UKSC 24, at para 13 per Lord Hodge), when carrying out exercises in statutory construction it has already been confirmed that '[w]ords and phrases in a statute derive their meaning from their context' (see R(O) v Home Secretary [2022] UKSC 3, at para 29, again per Lord Hodge).  This decision reinforces the use of the context in which words appear in statute as an aid to determining their meaning.  

The result of this decision is that capital allowances are available in respect of a major piece of national infrastructure (indeed, the SC commented that the hydro-electric scheme at Glendoe is the only large-scale hydro-electric power scheme of its type built in the UK in the last 50 years).  No tax depreciation would otherwise have been available, due to the gap in time between the abolition of the old Industrial Buildings Allowance in 2008 and the entry into force of the (relatively) new Structures and Buildings Allowance, which applies only for expenditure incurred on or after 29 October 2018.  

The judgment can be viewed here.

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