In SSE Generation Ltd v HMRC [2018] TC06618 the First Tier tribunal (FTT) held that some of the expenditure on constructing a hydroelectric power scheme was eligible for capital allowances as plant; the rest was specifically excluded by CAA 2001.
Capital allowances are available in respect of Qualifying expenditure on the provision of plant and machinery used in a Qualifying activity:
- In accordance with the Capital Allowances Act (CAA) 2001 at sections 21 to 23, which specify that certain items are treated as:
- Buildings, including sewerage and drainage systems. (s21 CAA).
- Structures and works, including tunnels, aqueducts, weirs, drainage ditches, inland navigations such as canals, basins, or navigable river and dams, reservoirs or barrages, including any sluices, gates, generators or other equipment associated with them. (s22 CAA).
- Plant and machinery, including pipelines or underground ducts or tunnels with a primary purpose of carrying utility conduits. (s23 CAA list C).
- Expenditure on buildings, structures and land do not qualify for capital allowances.
- Qualifying expenditure includes expenditure on the alteration of land for the purpose of installing plant or machinery.
SSE incurred some £300 million of expenditure in constructing and then remediating a hydroelectric power generation scheme near Loch Ness:
- It claimed capital allowances in respect of £260million of the spend of which HMRC had accepted £34million.
- Some of the amounts claimed related to rectification works following a major rockfall. The parties agreed that the treatment of these costs should follow the treatment of the initial expenditure on the construction of the respective elements of the scheme.
- HMRC disqualified expenditure, citing s21-23 CAA, on the construction and remediation of items such as:
- water intakes including screens, conduits and various tunnels.
- the headrace and tailrace which carry the water between the reservoir and the generating equipment.
- the power and transformer caverns; man made voids in the rock housing equipment and transformers.
- SSE appealed.
The FTT allowed the appeal in part and found that:
- The water intakes and screens (which were not dams, reservoirs or weirs), some of the conduits (some fell into the definition of aqueduct and were disqualified), the headrace and tailrace, and the transformer cable tunnel, were all plant and qualified for capital allowances.
- Expenditure on the creation of the caverns and the main access, connection and emergency tunnels, did not qualify. These tunnels, unlike the transformer tunnels, did not have a primary purpose of carrying utility conduits.
The judge said that the correct approach was to consider if,on an item by item basis, the scheme qualified as plant in common law. Then, if it did, to consider whether s21-23 applied to specifically disqualify it for capital allowance purposes. He said the legislation is carefully worded so as to not override the common law test for what is plant.
The technical aspects of this case make it a lengthy read as the FTT went through each item with great care. What it shows is the attention to detail required when dealing with large capital allowance claims; items which may at first sight appear to be excluded by the legislation can qualify depending on the specific facts of the case.
Given the substantial amounts involved this decision may well be appealed by HMRC.
Links:
Plant and machinery (companies): allowances
What expenditure qualifies for plant and machinery allowances
Annual Investment Allowance (AIA)
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