Capital Allowances denied on satellite launch costs
Overview
The First-tier Tribunal (FTT) and Upper Tribunal (UT) both found in favour of HMRC in denying Inmarsat Global Limited capital allowances on the launch costs of six leased satellites during the 1990s. Inmarsat had succeeded the trade of The International Maritime Satellite Organisation (IMSO), who had initially incurred the launch costs. Inmarsat deemed a sale had occurred due to the succession of trade, entitling them to Capital Allowances based on part of the market value at the time. It was concluded the provisions of CAA1990 s78 were not applicable in this instance as the satellites were not considered to belong the IMSO. Capital allowances were therefore denied. However the UT did overturn the initial rulings that the launch costs did not qualify as expenditure on the provision of plant or machinery and they were not a necessity of the lease requirements.
The Case
In August 2019 the FTT to upheld the decision made by HMRC denying Inmarsat Global Limited (the taxpayer) capital allowances. It was decided that Inmarsat was not entitled to capital allowances in respect of the launch costs of leased assets used in a trade that it had succeeded from The International Maritime Satellite Organisation (IMSO). IMSO had initially incurred these launch costs.
IMSO was an international organisation established to operate satellites for maritime communications and had leased six satellites from financial lessors and incurred the capital expenditure on launching them into orbit. However, IMSO was exempt from corporation tax due to the terms of a treaty it was established by and were not entitled to claim capital allowances. The respective finance lessors claimed capital allowances entitled to them on their capital expenditure incurred on the provision of the various Satellites for their (actual or deemed) leasing trades.
Several years later IMSO transferred its business to the corporate company, Inmarsat Global Limited. As part of the transfer, the lease agreements relating to the satellites were novated such that; from the date of the transfer, the satellites were leased by Inmarsat. The question referred to the FTT was essentially: Is Inmarsat entitled to capital allowances in respect of the satellites and if so, on what amount?
Inmarsat had claimed capital allowances in respect of the launch costs incurred by IMSO. Arguing that by paying launch costs, IMSO had incurred capital expenditure on the provision of the satellites, which they were also required to incur under the terms of the leases. In accordance with section 61(4) CAA90 (now CAA 2001 s70) Inmarsat claimed the expenditure effectively deemed the Satellites to have in part belonged to IMSO before the business transfer (the remaining ownership being the respective Lessors); and accordingly, by virtue of CAA90 s78(1) (now CAA 2001 s266) the Satellites were deemed to be sold to Inmarsat as a result of the business transfer. Thus entitling Inmarsat to claim capital allowances on a proportion of the market value at the time as the requirements of s24 CAA1990 were deemed to be met.
The FTT concluded that Inmarsat did not qualify for Capital Allowances in respect of the acquisition and launch costs because the satellites did not belong, nor were deemed to belong to Inmarsat as successor to IMSO’s business. The satellites remained at all material times as owned by the Lessors and no provision applied to deem the asset to belong to Inmarsat. Therefore the ownership requirement was not met and CAA1990 s78 did not apply.
If the FTT were wrong regarding CAA90 S78(1) they also considered s61: whether capital expenditure had been incurred by IMSO on the provision of satellites and if they were required to incur this under the relevant lease terms. The FTT agreed with HMRC that whilst the launch costs were considered capital expenditure and the satellites would be useless until in orbit, the expenditure was not on the provision of plant and machinery (p&m). “Any “provision of plant” must have at its heart the plant itself; simply moving someone else’s plant from A to B (even if B is the place at which it is to operate in your trade, and however complex and expensive the process of movement may be) cannot in my view amount to the “provision” of that plant.”
The FTT found in several of the leases, IMSO had no obligation to provide any launch costs, but accepted that some leases did. However, the lease terms did not commence until after the launch costs meaning s61(4) was not applicable when read in conjunction with s61(8) whereby costs can only be applicable to s61(4) after the lease exists.
Capital allowances where therefore denied to Inmarsat.
Appeal
Inmarsat appealed the verdict to the UT and a verdict was reach in March 2021.
The main point to consider was CAA1990 s78 and whether the conditions were met as if they weren’t the appeal would be dismissed regardless if s61 applied.
The parties agreed the pre conditions of s78 were met: 1) Succession to a trade IMSO had previously carried on. 2) The trade was, by virtue of s337 ICTA treated as discontinued. 3) The satellites were used in the trade of IMSO immediately before succession and immediately after succession in Inmarsat’s trade.
The argument therefore relates to the effect of capital allowances that s78 has, with Inmarsat’s main argument deeming s78 means satellites were “sold” to them and it follows that they “belong” to Inmarsat, meaning they are entitled to claim allowances under s24 CAA1990.
The objection to this is that s78 is not definitive on whether successors satisfy the “belonging” requirement. S78 also focuses on the disposal event to be brought in by the predecessor and their capital allowances position rather than tax treatment of the successor. Inmarsat disagreed and argued s78 is not concerned with the predecessors capital allowances position but the UT upheld that s78 provides important aspects of capital allowances treatment by the predecessor to determine the disposal value of an asset.
Inmarsat further argued that in s78(1) the p&m “shall, for the purposes of this Part, be treated as if it had been sold to the successor” should be interpreted as this now “belongs” to the successor and there is no policy reason why Parliament would have intended that only p&m that “belongs” to the successor should be treated as sold to that successor. If there is a situation where a predecessor is required to bring into account a disposal value equal to the market value of p&m, and the p&m continues to be used for the purpose of the trade carried on by the successor then it follows allowances should continue to be available to the successor.
The UT agreed that property being “sold” to a person can be deemed to “belong” to the successor but this is not a definite consequence. The question raised was whether the intention of Parliament would have been the deeming provision to extend as far as treating Inmarsat to be the owner of the Satellites, even though they did not actually own them. The UT agreed HMRC were correct in emphasising that if s78(1) were intended to establish a deemed “belonging” of p&m in the absence of real “belonging” further matters would have to have be established in the s71 legislation, such as when does deemed belonging end and what happens after.
The UT decided HMRC’s interpretation and Parliaments intended meaning for the legislation of s78 is applicable in this instance and unless Inmarsat became the actual owner of the relevant asset, claiming allowances would not be allowable.
Since the appeal found in favour of HMRC and the FTT for this, the other arguments do not need to be considered but were reviewed for clarification.
Was the expenditure incurred deemed to be on the provision for the purposes of trade of p&m?
In the appeal the case used references to the cases of both Ben-Odeco Ltd v Powlson and Barclay, Curle & Co Limited v Commissioners of Inland Revenue.
It was stated that if the satellites were owned by IMSO, it would be highly unlikely the launch costs incurred would have been challenged as “expenditure on the provision of” the Satellites given the FTT’s statement the Satellites are unusable until launched into orbit. HMRC, however, argued the Satellites not belonging to IMSO was an important factor since IMSO did not incur the expenditure providing the asset (ie the acquisition costs.). Rather the launch costs paid were simply “ancillary” or “freestanding” expenditure.
However the UT disagreed with HMRC and stated “If the launch costs would have had the necessary effect if incurred by an owner of the Satellites, we see no reason why, in the context of authorities on statutory predecessors to s24, it should be deprived of that effect when incurred by someone other than an owner.”
HMRC’s argued consequences would arise if IMSO’s freestanding expenditure on launch costs triggered an application of s61(4). S61(4) could not deem the p&m to belong both to IMSO and to the Lessors as this would give rise to potential double claiming if two parties treated a single asset as being their own. This was rejected by the UT as Inmarsat’s interpretation would not entitle IMSO (if it had been liable to corporation tax) to claim capital allowances on the price that the Lessors paid to acquire the Satellites as IMSO had never incurred that expenditure, so could never claim on these costs.
Overall, the UT also found in favour of Inmarsat in recognition of the expenditure being necessary and included as part of the leases and the “requirement” to procure the launch of the Satellites was sufficient to amount to a “requirement to provide” the Satellites for the purposes of s61(4). The UT ruled that if the I-3 Satellites had not been launched, IMSO would have been in breach of its obligations under the applicable Lease.
The UT disagreed that 61(4) was not applicable when read along with s61(8), as there would be no reason why any contractual obligation to procure launch of the Satellites should be discounted because it was not in existence at the time the Leases were signed. I.e. if there is a “requirement”, s61(4) makes no stipulation as to the point in time at which that requirement must come into existence.
The UT also applied consideration of commercial common sense. The leases envisage commercial benefits to the Lessors and IMSO from the provision of the satellites. If they were never launched, no revenue would be obtained to pay the Lessors the rent. It is unlikely the IMSO could not launch the satellites without breaching their contract.
HMRC further argued even if there was a requirement to procure launch services it was not a requirement to provide p&m as s61(4). The UT decided the expenditure incurred on launching the Satellites was expenditure on the “provision” of those Satellites as it follows that the requirement imposed on IMSO to launch the Satellites was a requirement to “provide” those Satellites.
HMRC also put forward the lease commencing after satellite launch puts the expenditure outside the scope of s61(4) for two reasons : (1) Section 61(4) requires that the relevant taxpayer must be a “lessee” when the expenditure is incurred. (2) The way that agreements for lease are dealt with in s61(8) emphasises this requirement. The definition of “lease”, includes an agreement for lease, but only “where the term to be covered by the lease has begun”. That brings within the scope of s61(4) expenditure that would have been “under” the lease but for a delay in the lease’s execution and emphasises the temporal requirement imposed by s61(4).
Whilst the UT acknowledged these points, they disagreed with the conclusion and agreed with Inmarsat’s interpretation of s61(8). Where leases are often preceded by agreements for lease and this is recognised by Parliament. Due to this, an agreement for lease can be a source of a “requirement” to provide p&m in addition to the actual lease. If there is a requirement in an agreement for lease, but the lease is not granted, Parliament did not intend for the requirement in the agreement for lease to count. That is realised by providing that an agreement for lease is only within the scope of s61(8) where it culminates in the grant of an actual lease.
Since the FTT was considered correct in determining s78 to not be applicable, the appeal was dismissed. Despite the fact that the UT disagreed with the FTT’s determination of s 64(1) not being applicable and the expenditure not being a requirement of the leases.
Lovell Consulting View
We view that the UT has made the correct decision in rejecting the appeal based on CAA 90 s78. The succession of trade rules are not applicable as the satellites never belonged to IMSO. However we would agree that expenditure on the launch costs would be classified as provision of plant and machinery. The above case highlights the difficulty in ascertaining entitlement to capital allowances on leased assets and there can often be different interpretations of the legislation. But it shows the importance of involving a capital allowances specialist as early as possible to establish any right to claim.
