No capital allowances for leased satellites

In Inmarsart Global Ltd v HMRC [2021] UKUT0059, the Upper Tribunal refused a claim to Capital Allowances for the launch costs of leased satellites. The assets did not ‘belong’ to the taxpayer in the way that the legislation required.

Capital Allowances are available when a person incurs expenditure on the provision of plant and machinery for use in a trade and as a consequence of incurring the expenditure the plant and machinery ‘belongs’ to them (s.24 CAA 1990).

• Where there is a succession to a trade, under s.78 CAA, unless an election is made, assets are deemed to be disposed of to the successor business at their market value and the successor business can claim allowances on eligible assets based on that value.
• Under s.61 CAA, where a lessee incurs capital expenditure on the provision of machinery or plant which they are required to provide under the terms of the lease, the machinery or plant is treated as ‘belonging’ to them if it continues to be used for the purposes of the trade.

Inmarsat Global Ltd (Inmarsat) had claimed capital allowances on the costs of launching six satellites over a six-year period from 1990 to 1996.

• The satellites were said to be useless until they were launched into orbit.
• Inmarsat only acquired rights over the satellites after their launch in 1999 when it succeeded to the trade of the International Maritime Satellite Organisation (IMSO).
• IMSO had ordered the satellites but before delivery, it novated the contracts to a third-party leasing company. IMSO paid the launch costs.
• The lessors had claimed capital allowances on their costs of acquiring the satellites.
• IMSO was not subject to Corporation Tax so had not claimed capital allowances on the launch costs.
• HMRC challenged Inmarsat’s capital allowance claims.

The First Tier Tribunal (FTT) had held that:

• The succession of trade rules at s.78 CAA 1990 could not apply as the satellites never belonged to Inmarsat.
• Whilst the satellites were useless until launched, the launch costs did not qualify for capital allowances. They were not incurred on the provision of machinery or plant.
• Inmarsat appealed. Their key ground of appeal was that as s.78 deemed the satellites to have been sold to them, it necessarily followed that the satellites ‘belonged’ to them.

The Upper Tribunal (UT) disagreed, dismissing the appeal.

• That s.78 deems the assets to be sold does not make it inevitable that the assets then belong to the successor to the trade, even though it is capable of having that effect.
• Had this been the intention of Parliament, s.78 would contain provisions to deal with matters such as when the deemed belonging comes to an end and it does not.
• S.78 has no application in relation to a successor such as Inmarsat unless it becomes the actual owner of the relevant asset, at which point s.78 would fix the amount of expenditure on which Inmarsat could claim allowances. It also does not follow that if s.61 had allowed IMSO to claim allowances by deeming the assets to belong to it as lessee, this right would be transferred to Inmarsat under s.78.
• Although it did not affect the UT’s overall decision, they agreed that:
  • The expenditure on the launch costs did form part of the provision of plant and machinery and the FTT was wrong to have found otherwise.

Comment

Capital allowances on leased assets are notoriously difficult to claim. Add in the interaction of two deeming provisions in the legislation (s.61 and s.78 CAA) and the position becomes even more complicated to resolve. A clear and logical walk through the legislation and case law on the subject is required.

UPDATE: the case was appealed to the Court of Appeal who agreed with the lower courts and dismissed the appeal.

Useful guides on this topic

Plant & machinery: Allowances
What capital allowances are available on plant and machinery? How do you calculate them? What are qualifying activities?

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

Leases: Plant and machinery
A summary of the accounting and tax treatment of leased plant and machinery (P&M).

External Links

UT: Inmarsart Global Ltd v HMRC [2021] UKUT0059 

FTT: Inmarsat Global Ltd v HMRC [2019] TC7351