Capital Allowances – Case Summaries
12th July 2012
We have seen in recent years a number of Tax cases – going through both the Courts and Tribunal system – testing some of the long established principles of the Capital Allowances legislation. We have looked at some of the more significant ones below and summarised their findings:-
March 2010 - B&E Security Systems Ltd v HMRC Commissioners [2010] UKFTT 146 (TC)
‘Expenditure incidental to the installation of plant’ s25 CAA 2001
This case tested the recent principles laid out in Wetherspoon (JD) plc in regards to construction work incidental to the installation of plant & machinery in existing buildings. In Wetherspoon it was determined that in order for work to be properly considered ‘incidental’ to the installation of plant & machinery, the works need to have sufficient ‘nexus’ to the items of plant being installed.
In the B&E case, the Appellant installed, maintained and monitored intruder alarm systems. For the purposes of the operation of two specific security contracts B&E constructed a security control room in an existing building in which they housed specialist security equipment. B&E claimed the cost of both the security equipment and control room as qualifying for plant & machinery allowances, however the expenditure incurred on the control room was rejected by HMRC.
The Tribunal accepted that the control room was required for the business to operate its security equipment and indeed that the Appellant was required to satisfy the conditions of the relevant British Standard in the construction of the control room.
The Tribunal, however, rejected HMRC’s argument that the control room was merely being created as a room in which the plant & machinery could function and was therefore ‘consequential’ to the installation of plant rather than ‘incidental’. Instead the Tribunal decided that the building of the control room was inevitable to house the security equipment once the specific security contracts were won. They were also influenced by the fact that the expenditure on the control room was not disproportionate to the expenditure on plant. The Tribunal decided that the control room expenditure was ‘inextricably linked’ with the plant expenditure by means of a ‘close causative nexus’ to the plant. They decided that the control room expenditure would not have been incurred if the plant was not going to be bought and so found for the Appellant in this case and allowed the full expenditure to be plant & machinery.
Whilst it should be welcomed that this decision went in favour of the Taxpayer and that HMRC in this case interpreted the rules rather too narrowly, the writer remains unconvinced that this will change HMRC’s general approach. The construction of plant rooms and rooftop plant housings in existing buildings have historically been considered to be ‘setting’ and merely a room in which the equipment could function (per the Inspectors approach in this case) and have historically been rejected if claimed as ‘incidental’ to the installation of plant. The principle of ‘nexus’ to the item of plant as defined in the Wetherspoon case will, we suspect, override the approach taken in B&E Security Systems.
Notwithstanding the findings in this case, expenditure properly considered as ‘ancillary’ to the installation of plant – whether in an existing building or a new one - will continue to be allowable as part of the cost of the item of plant being installed.
November 2010 - Andrew v HMRC Commissioners [2010] UKFTT 546 (TC)
‘Smoking shelter as plant’
A pub operator had installed a smoking shelter within their garden premises. It was not fixed to the ground and was in the form of a ‘gazebo’. The Tribunal agreed that the item was plant in that it was not a building, gave insubstantial shelter and as it was not fixed to the ground, it was not a structure.
June 2011 - G Pratt & Sons v HMRC Commissioners [2011] UKFTT 416 (TC)
‘revenue deduction for farm driveway resurfacing’
This recent case demonstrates that HMRC’s initial approach can often be somewhat surprising even in what seems to be a straightforward case.
G Pratt & Sons operated a farm partnership and undertook the resurfacing of a farm driveway and claimed a deduction from profits for the costs. The driveway was resurfaced with concrete replacing the earlier tarmac covering. HMRC contended that the ‘entirety’ of the driveway had been replaced and the new surface was effectively an improvement.
The Commissioners however disagreed with HMRC and found that the driveway resurfacing represented a repair to an existing asset and the fact that the driveway had not been widened or adapted to carry heavier loads was key to their deliberations.
June 2011 - Brockhouse (Mr PD, Mrs J & LD) v HMRC Commissioners [2011] UKFTT 376 (TC)
‘personal security assets qualifying as plant & machinery’ s33 CAA2001
The Appellant in this case had purchased and erected substantial security fencing to supplement the fencing that already surrounded his fishing stock lake which supplied his aquatics retail business. The Appellant claimed that the purpose of the fencing was more to protect his personal safety rather than simply secure the safety of his fish – unfortunately the reasoning presented in the case was rather confused and ranged from the fencing being a repair, all the way through to the fencing being for personal safety.
HMRC had rejected this claim on the basis that in order for the assets to be plant under s33, the ‘special threat conditions’ defined had not been met – being that the asset was provided to meet a special threat to the persons security, and that threat arose in the course of the qualifying activity. Furthermore that the expenditure incurred was solely to meet that threat, and that the asset improved the person’s physical security.
The Commissioners found in favour of HMRC, and agreed that the threat to the Appellants personal security was not exceptional and that the evidence of this threat was minimal. Furthermore the evidence indicated that the purpose of the fencing was at least in part to protect the stock in the lake, so could not be solely for the purposes of protecting the personal physical security of the Appellant.
June 2011 - Tapsell and Lester (in partnership as the ‘Granleys’) v HMRC Commissioners [2011] UKFTT 376 (TC)
‘apportionment of purchase price for second hand assets’ s562 CAA2001
In this case the Appellant claimed capital allowances on the acquisition of a second hand residential care home. The acquisition contract defined the purchase price as being allocated between goodwill, property, benefit of contract and fixtures and fittings. The Appellant claimed capital allowances of over £100,000 on the apportionment of purchase price plus the amount allocated in the contract towards fixtures and fittings.
Subsequent to the submission of the capital allowances claim by the Appellant, the Vendor also submitted a capital allowances claim for the same period, although no details of the claim were presented. Consequently, HMRC disallowed the buyers claim to relief on the grounds that they failed to show that the seller had not claimed on the same expenditure.
The buyers had engaged a specialist to compute the apportionment value, however it emerged that the specialist had originally been engaged by the Vendor in this case, and due to the non payment of several invoices, the capital allowances report that had been prepared had not been presented to the Vendor. The Appellant had assumed that as this report had not been presented to the Vendor, that the Vendor would not make a claim for allowances.
The Tribunal found in favour of HMRC and denied the buyer’s claim to relief on the apportionment of the purchase price on the basis that the burden of proof that the seller had not made a claim was on the buyer. The Tribunal stated that the onus was on the Appellant ‘to enquire as to the disposal value used by the Vendor’.
What we are not clear on is why then the Tribunal did not allow the Appellant to claim allowances based on the disposal value as stated by the Vendor (per s185 CAA2001). S185 restricts the amount the buyer can claim to the sellers disposal value, with this being limited to the sellers original cost. In addition, the buyer has recourse to calculate his claim for allowances based on ‘a just apportionment of the purchase price’ (albeit limited to the seller’s disposal value) per s562 CAA2001, and once again this was ignored by the Tribunal.
The findings in this case do not entirely follow the rules as they are currently set out, but do demonstrate the need to carry out a thorough ‘tax history’ investigation on second hand property claims. The fixtures rules have changed since April 2012 and now require that both parties on sale use the mechanism of a s198 CAA2001 election to identify and agree the value of fixtures on sale. This will ensure that the dialogue that was missing in this case between the buyer and seller will, in future, predominantly be had during the course of the transaction or within 2 years thereafter, rather than several years later.
JD Wetherspoon – Upper Tribunal update 31 Jan 2012
Plant or premises
Incidental expenditure (formerly s66 CAA1990, now s 25 CAA 2001)
We have been following developments in this case since its appearance in the special commissioners in 2007. In the latest outing the Upper Tribunal has ruled on three of the outstanding disputed areas:-
Wall panelling – plant or premises – ‘decorative’ timber panelling had been installed within several pub premises. JDW had claimed this as qualifying as a piece of plant as an embellishment to enhance the pub atmosphere (ie creating ambience) but also that these items retained their own separate identity and had not become part of the premises. The Upper Tribunal disagreed and stated that the panelling was an ‘unexceptional component’ of the pub, regardless of how it was fixed to the walls, and was merely part of the premises.
Incidental expenditure – JDW had claimed several categories of expenditure incidental to the installation and plant and had, perhaps, extended the definition of ‘incidental’ a little too far in the view of the Upper Tribunal. Describing the construction of toilet walls, doors, floors and tiling as incidental to the installation of sanitaryware was ‘extremely unrealistic’ in the view of the Upper Tribunal. Similarly the Tribunal agreed with the Special Commissioners in their original findings that the construction of a kitchen in an existing building was not incidental to the installation of the cooker.
Splashbacks were also considered in some detail by the Upper Tribunal and whether they could properly be considered incidental to the installation of plant. They concluded that a short row of tiles installed behind a sink could be incidental to the plant as it is specifically there to protect the wall from getting wet. Should the remainder of this wall be tiled for several reasons, then this tiling would not be eligible, and nor would the fraction that would have been called a splashback.
Preliminaries – these items of builder’s overhead expenditure had been a source of great contention between the parties. HMRC contended that where possible these items should be specifically allocated to plant items, and only those items that could not be so allocated should be apportioned across the full expenditure. The Tribunal rejected this approach and declared that a ‘common sense approach’ should be taken to the preliminaries, ie a pro-rata allocation of preliminaries was allowable.