Capital allowance claims on power plant upheld but not extended

In HM Revenue & Customs v SSE Generation Ltd [2021] EWCA Civ 105, the Court of Appeal upheld the decision of the Upper Tribunal that disputed items of expenditure qualified for capital allowances but did not allow extended allowances on a procedural point.

The Upper Tribunal upheld the First Tier Tribunal (FTT) decision that certain items of expenditure on plant qualified for capital allowances and extended allowances available to items previously disallowed. In SSE Generation Ltd v HMRC, the FTT held that some of the expenditure on constructing and remediating a hydroelectric power scheme near Loch Ness was eligible for Plant and Machinery capital allowances, the rest was specifically excluded by CAA 2001.

HMRC appealed to the Upper Tribunal (UT) in respect of the higher cost allowable items. 

There was much discussion in the UT on the interpretation and purpose of s.22 CAA, which disallows expenditure on:

• The provision of a structure or other asset in list B (excluded structures such as tunnels, aqueducts, bridges).
• Any works involving the alteration of land.

HMRC claimed the ‘works on the alteration of land’ clause is a general sweep-up provision for when an item of expenditure is not held to be on the provision of a structure.

The UT disagreed; this was not parliament's intention and suggested that the correct approach is:

• To consider whether the structure or asset falls within any of the specified structures or assets in List B.
  • If it does, the expenditure is disallowed unless s.22 is disapplied because the expenditure is on any of the items on List C (items not affected by s.22).

There is no separate consideration on whether the construction of the structure involved the alteration of land.

The UT said words within the Capital Allowances Act 2001 should be given their ordinary meaning. They disagreed with some of the ordinary meanings adopted by the FTT which were errors of law, but this did not affect the overall result as to what was and was not eligible expenditure.

The appeals were dismissed for all but one item disallowed by the FTT, which the UT found was eligible for allowances.

Both tribunal decisions were lengthy, exploring the meaning of the Capital Allowances Act (CAA) provisions in some detail. The average capital allowance claim will not be as complex as this but the case does reinforce that details matter. Businesses should ask contractors for detailed breakdowns of the costs of any building works at the time to ensure claims can be maximised.

Court of Appeal (CA)

HMRC appealed to the CA on the grounds that:

• The UT and FTT had wrongly interpreted the legislation and given too narrow a construction to some of the words used therein. 
• Where the UT has disagreed with the FTT, these were finding of fact and not within the remit of the UT.
• With regard to the UT overturning the FTT's finding that some of the expenditure did not qualify, the UT could only have considered this point if it had been brought on appeal by SSE Generation Ltd (SSE).

The CA agreed with the findings of the FTT and the UT where both tribunals had agreed, including on the interpretation of the legislation and narrow construction of some words. In the instance of the FTT denying capital allowances as the items of expenditure that did not qualify:

• The CA agreed with the UT that they did qualify for capital allowances and that the FTT had been wrong in its interpretation of the legislation.
• The CA also found that the HMRC argument, that this could only be considered on appeal by SSE, was correct.

The CA upheld the decision of the UT on all points, save for the increased capital allowances awarded by the UT due to SSE failing to follow the correct procedure.

Useful guides on this topic

Plant and machinery (companies): allowances
What are the capital allowances on plant and machinery? How do you calculate them? What are the qualifying activities?

What expenditure qualifies for plant and machinery allowances
What expenditure qualifies as plant and machinery? What is treated as part of a building? What is excluded?

Annual Investment Allowance (AIA)
What is the Annual Investment Allowance? What are the limits? What expenditure qualifies?

External link

HM Revenue and Customs v SSE Generation Ltd: [2019] UKUT 0332

HM Revenue & Customs v SSE Geneeration Ltd [2021] EWCA Civ 105