The special commissioners allowed in part an appeal by the taxpayer against the Revenue's refusal of its claim for capital allowances in respect of building works in connection with the refurbishment of its premises for the purposes of its trade.

Facts

The taxpayer company owned and developed public houses throughout the UK. In its corporation tax return for the year to 31 July 1999 it claimed qualifying capital allowances under CAA 1990, s. 24 and 66 in respect of building costs, professional fees and head office costs of £33,740,007 which were reduced by Revenue and Customs to £17,562,348.

The taxpayer appealed and the hearing concerned sample claims involving one per cent of the total expenditure in the appeal in respect of the conversion of two specified public houses (P and F) including 123 individual items not including preliminaries. P had been converted from an old theatre with the basement being converted into a kitchen with new walls with wipe-free tiles, together with toilets, walls, partitions and drainage. Work had been carried out on F to create toilets and drainage.

It was common ground that the expenditure in question was capital expenditure incurred wholly and exclusively for the purposes of the taxpayer's trade.

The appeal dealt specifically with the expenditure claimed by the taxpayer under CAA 1990, s. 24 on decorative wood panelling, to create ambience for the purposes of its trade. Claims were made for incidental works under CAA 1990, s. 66 for alterations to P, whereby the wipe-clean kitchen walls were constructed to enable the installed cookers to be used in carrying on its trade; and also claims in relation to the toilets and the drainage in both pubs required under various regulations, including health and safety; and certain site overhead expenditure and preliminaries, including professional fees (such as structural engineers and planning supervisory fees) which were attributable to expenditure.

The taxpayer argued that the wood panelling retained a separate identity from the premises and was plant for the purposes of s. 24. Affixation was not conclusive.

The phrase ‘incidental to the installation’ in s. 66 covered alterations involving more ‘than mere installation in order that the new machinery or plant may serve its proper purpose’. In the present case health and safety requirements meant that there had to be wipe-clean surfaces for the cookers to be used. The installation of cookers went beyond provision and involved installing something that could be used. Moreover, the walls and partitions in the toilets had no independent purpose. It was irrelevant that the alterations also performed other functions. The preliminaries claimed were by their nature attributable to plant in part and a proportionate allocation was both sensible and permissible.

The Revenue argued that the panels were fixed to the wall and formed part of the premises; as such they were not plant. The tiling and wipe-free ceilings in the kitchen were not incidental to the installation of the cooker. Health and safety legislation required wipe-free ceilings in all work place kitchens. Section 66 covered work incidental to the installation rather than consequential health and safety requirements. Many of the alterations claimed were in reality alterations to the buildings. Building a new kitchen before installing equipment was the construction of a new kitchen rather than expenditure incidental to the installation of the equipment. The costs of preliminaries should be specifically attributed to items of plant and machinery where possible with an apportionment of the residual items. Section 66 did not have any relevance as preliminaries were confined to s. 24 expenditure and the items in dispute did not relate to plant.

Issues

Whether the expenditure on P and F qualified as plant under CAA 1990, s. 24 or under s. 66; whether the expenditure qualified as building alterations incidental to the installation of plant within s. 66; and whether certain site overhead expenditure or preliminaries, including professional fees, such as structural engineers and planning supervisory fees, was in part attributable to expenditure under s. 24 or s. 66, and if so how it should be allocated.

Decision

The special commissioners (Theodore Wallace and John Walters) (allowing the appeal in part) said that, in determining whether expenditure was on the provision of plant for the purposes of s. 24, if an item was or had become such an unexceptional component of the premises into which it was introduced, it would not retain a separate identity in order to qualify as plant. That was supported by the treatment in Sch. AA1, para. 1(2) of any asset in a building which was not incorporated into the building but was of a kind normally incorporated into buildings, as effectively, part of the building, and also the exclusion from that treatment of ‘decorative assets provided for the enjoyment of the public in the hotel, restaurant or similar trades’. Further, if an item was regarded as part of the premises, it was not plant provided for the purposes of a trade, except in the rare cases where the premises themselves were plant, which was not the case here. As the decorative panelling effectively turned the premises from an unpanelled into a mainly panelled room, it was more appropriately described as part of the premises rather than having a separate identity. In those circumstances, the panelling did not qualify as plant.

Section 66 did not create a new category of expenditure beyond items truly incidental to the installation of plant. There was a real distinction between alterations to a building incidental to the installation of plant and alterations consequential on the installation of the plant. It would be stretching s. 66 beyond its purpose to allow expenditure on the construction of kitchen walls to qualify, on the basis that the exigencies of the taxpayer's trade, including statutory or regulatory requirements, required the kitchen walls to be constructed to enable the cooker to serve its proper purpose. The construction of the kitchen walls was not incidental to the installation of the cookers but part of the creation of a kitchen, in which the cookers and other kitchen equipment could function properly and did not have sufficient nexus to the installation of the cookers to qualify. The tiles had an insufficient nexus with the installation of equipment such as cookers to be incidental thereto and were fixed to facilitate cleaning of the walls. On the other hand, the timber partitions and doors to the individual toilets did have sufficient nexus as the toilets could not be properly used without partitions or cubicles. The drainage items in both premises also qualified as a trade specific sewerage system or they were incidental alterations within s. 66.

The expression ‘preliminaries’ was not a precise term but all items covered would constitute integral parts of the construction costs of the measured work to the extent that they could be properly apportioned to such work. Preliminaries could be apportioned to s. 66 expenditure and were not confined to s. 24 expenditure but the allocation of preliminaries had to be as accurate as reasonably possible. Where a relatively small amount of work and record-keeping would give substantially greater accuracy, it would be reasonable and proportionate that that should be done. However where a large amount of work would not result in greater accuracy, the additional work would be disproportionate to the gain. In a case such as this, where the capital expenditure to which the preliminaries related involved multiple items, a relatively small pro-rata apportionment was in principle reasonable and justified under generally accepted accounting practice.

The disputed items were projected overheads to be apportioned rateably over all the measured work. It could not have been the intention of Parliament that if a taxpayer was to be entitled to include preliminaries in capital expenditure claimed it should be necessary to enter into a detailed assessment in order to allocate the preliminaries.

(2007) SpC 657.

Decision released 21 December 2007.