In this long running case, the Upper Tribunal was asked to consider further appeals in respect of expenditure on building works which the taxpayer wished to claim as qualifying plant for the purpose of claiming capital allowances.

This particular case was an appeal from two successive decisions in the same proceedings by the First-Tier Tribunal. Those decisions resolved appeals by J D Wetherspoon plc (JDW) against the disallowance by HMRC of claims for capital allowances for expenditure on the fitting out and refurbishing of public houses.

Background

HMRC had issued a closure notice in 2003; the effect of which was to adjust downwards expenditure on qualifying allowances in respect of building costs, professional fees and head office costs from some £33.7 million to some £17.5 million. The disputed claims related to a large number of JDW's public houses, but the parties sensibly agreed to limit the purview of the Special Commissioners to two pubs as test cases.

The aggregate value of the disputed items was £0.5 million approx. with a large number of individual disputed items in each pub. In delivering the First Decision, the Special Commissioners (SC) had confined their review so as to focus their reasoning on a number of specific items, in the expectation (which proved to be unfounded) that the parties would be able to resolve the remainder by the application of the principles applied by the SC.

That approach did lead to a substantial narrowing of issues (subject to appeal). Nonetheless, there remained a substantial body of “unclear items”, which the First-Tier Tribunal then dealt with in the Second Decision.

Neither party was content with the decisions. There was therefore an appeal by JDW and a cross-appeal by HMRC.

The matters in dispute were argued under the following three headings:

1. Plant or Premises – section 24

JDW appealed on the ground that the decisions wrongly categorised four decorative items included within the fit-out as failing to qualify as plant because they had become part of the premises. The items in question consisted of panelling, cornices and architraves and metal end-pieces to balustrades.

2. Incidental Expenditure – section 66

JDW argued that the decisions adopted an incorrectly narrow construction of the phrase, in section 66, “capital expenditure on alterations to an existing building incidental to the installation of machinery and plant for the purposes of the trade”, and thereby excluded expenditure on substantial parts of the kitchen and toilet areas constructed and fitted out.

For its part HMRC supported the construction of section 66 applied, but complained that, in respect of certain items in the kitchen and toilet areas, that construction had not then been applied.

3. Apportionment of Preliminaries

HMRC cross-appealed on the ground that the Tribunal was wrong to permit expenditure on certain preliminary items to be apportioned by reference to the ratio between qualifying and non-qualifying (for capital allowances) works within the project for refurbishment as a whole, upon the ground that since those items were “trade specific” it was incumbent on JDW to prove the precise amount of them expended upon qualifying works.

Decision

The Upper Tribunal held the following:

1. Plant or Premises – section 24

Section 24 of the Capital Allowances Act 1990 was the relevant section in force at the material time. However, neither the 1990 Act nor any of its predecessors ever provided a definition of plant, but there is a considerable body of case law on the matter.

Some non-exhaustive assistance is now to be found in Schedule AA1, which was inserted by the Finance Act 1994, with effect after 29 November 1993. This provides that in particular any asset in or in connection with the building included in any of the items in column 1 or column 2 of table 1 is for the purposes of the Act expenditure on the provision of machinery or plant.

“The question seems to be whether it would be more appropriate to describe an item as having become part of the premises rather than as having retained a separate identity. This is a question of fact and degree, to which some of the relevant considerations will be: whether the item appears visually to retain a separate identity, the degree of permanence with which it has been attached, the incompleteness of the structure without it and the extent to which it was intended to be permanent or whether it was likely to be replaced within a relatively short period”.

The Tribunal's conclusion was that, balancing all those matters, the panelling was more appropriately to be described as having become part of the premises than as having retained a separate identity. Accordingly it did not qualify as plant.

It was also clear from the First Decision that the Tribunal never lost sight of the fact that the legal principle to be applied was to ascertain whether, in all the circumstances, the panelling had retained its separate identity, or lost it by becoming part of the premises.

The appeal by JDW was entirely dismissed.

2. Incidental Expenditure – section 66

The Upper Tribunal's decision was that it is required to apply tax law purposively. As a result, section 66 does not provide a new or separate category of allowable expenditure but is a deeming provision which requires expenditure on certain alterations to existing buildings to be treated as expenditure on the provision of plant or machinery even if, apart from the section, it would not have been so treated.

The touchstone for that deeming provision is that the expenditure on alterations be “incidental to the installation of the machinery or plant”. Viewed purposively, the focus of the section is on the point that if plant is installed in an existing building rather than in a purpose-built new building, it is entirely possible that something will not fit, and that this will lead to alterations having to be made to the existing building.

In the case of a purpose-built new building, there will generally be no equivalent need for such expenditure. Thus section 66 levels the playing field between new and existing buildings by affording taxpayers relief for expenditure on existing buildings which would not be needed in relation to the installation of the same plant in new buildings, or in the open.

JDW's case was that section 66 applies to any alterations designed to facilitate the better use of installed plant. However, the Upper Tribunal's view was that there was no ground for assuming some Parliamentary purpose that an additional subsidy should be given for renovations, and the re-use of existing buildings.

The Upper Tribunal then went on to deal with the specific items under appeal.

All the section 66 appeals by the Appellant were dismissed as were the section 66 cross-appeals by HMRC in relation to the strengthening of the kitchen floor, and the drainage work required in the cold store. HMRC's cross-appeal in relation to all the expenditure claimed under section 66 in the toilet areas, except the expenditure on the non-blockwork cubicle partitions, was allowed.

3. Apportionment of Preliminaries

Preliminaries are, by their nature, items of overhead expenditure which cannot be, or which have not been, attributed to any single item in a building project. Some, like insurance, are inherently incapable of being so attributed. Others, like scaffolding, may be capable of specific attribution, but the time and cost involved in the process of specific attribution is often disproportionate to the amount at stake.

In the present case the parties were in dispute about a class of preliminaries which were ‘trade specific’, that is, attributed to particular types of building activity, such as scaffolding, electrical and photography of work in progress, but which had not at the time been attributed to specific items of work.

JDW claimed to be entitled to apportion them for capital allowances between allowable and non-allowable works in the ratio derived from the respective aggregate specific costs of those two classes as a whole.

HMRC maintained that a trader seeking capital allowances must specifically attribute all expenditure which is capable of attribution, however time-consuming or uneconomic that process may be. Accordingly, HMRC maintained both before the Tribunal and on this appeal that no part of the expenditure was allowable because it had only received a trade specific rather than item specific attribution, and because those items were not inherently incapable of specific attribution.

The First Tier-Tribunal's conclusion was that a pro rata apportionment of any preliminaries where a detailed item by item attribution would be disproportionately time consuming or expensive, was a legitimate basis for claiming capital allowances for preliminaries, because it was a reasonable, common-sense solution which accorded with generally accepted accounting practice.

The Upper Tier-Tribunal agreed and stated that it cannot have been the intention of the legislature that a trader should have to spend more on the minute attribution of preliminaries to underlying items of work than either their cost or the value of the capital allowance thereby to be obtained. Accordingly HMRC's cross appeal on this was dismissed.

The full text of the case is available at: http://www.bailii.org/uk/cases/UKUT/TCC/2012/42.html