Capital Allowances Tax Case Regarding Disputed Expenditure on the Structures of an Enrichment Plant
URENCO CHEMPLANTS LIMITED AND URENCO UK LIMITED V HMRC [2022] UKUT 00022 (TCC)
Overview
In 2018, Urenco (The Appellant) constructed a £1bn specialist facility at Capenhurst in Cheshire, which is used for the enrichment of uranium and the “deconversion” of the radioactive, corrosive, toxic and unstable by-product, uranium hexafluoride, known as “Tails”.
On 07 August 2019, the First-Tier Tribunal (FTT) dismissed The Appellant’s appeal in claiming capital allowances on certain disputed expenditures amounting to £192m. In summary, as background information, the FTT’s decision and the Lovell Consulting article can be found on:
On 28 January 2022, nearly two-and-a-half years following the FTT’s decision to dismiss the appeal, the Upper Tribunal (UT) decided that the FTT erred in law on certain grounds for appeal raised by the Appellant in deciding whether the disputed expenditures qualify as plant and machinery.
Below are the following six grounds that FTT granted the Appellant’s permission to appeal:
- The FTT decision misclassifies the safety functions of assets used in shielding, containment and seismic qualification as merely being “part of the setting” as opposed to being assets used in the business and having plant-like functions.
- The FTT decision unduly restricts the expenditure which qualifies as being “on the provision of” plant or machinery under case law principles.
- The FTT took an erroneous approach in determining whether an asset is a “building” for the purpose of Section 21.
- The FTT decision erroneously identifies and classifies the relevant purposes of the “alterations of land” for purpose of List C, Item 22 in Section 23.
- The FTT failed to identify that expenditure “on the provision of” assets falling within List C, Items 1 and 4 can qualify for allowances, even if it is not expenditure on purchasing the machinery or processing equipment.
- In all circumstances, the FTT decision incorrectly identifies the plant and machinery allowances available as a result of expenditure on the disputed items.
Of the six grounds, the UT found that the FTT erred in law in Grounds 1 and 3, and part of Ground 2. The UT has concluded that the more appropriate course taking these points into account is for the case to be remitted and FTT to resubmit its decisions concerning the errors of law identified.
GROUNDS OF APPEAL
Ground 1: Were the Disputed Assets plant?
The FTT considered that in applying the functionality test, the safety-significant structures form part of the setting for the process to be carried out, regulatory environment including structure shielding and/or containment is not relevant as to whether an asset performs a function in the trade. Without these structures, the actual processes ‘could still be carried out efficiently’.
The UT, however, considered that the regulatory / safety aspects in assessing the functionality of the disputed items in relation to the nature of the Appellant’s business are relevant to assessing the functionality test. Where in theory the processes could still be carried out efficiently, in actuality the Appellant’s business ‘could not be carried out at all’ if regulatory constraints and safety functions were not relevant as disputed by the FTT.
The UT, therefore, concluded that the FTT erred in law in its application of the functionality test to the disputed expenditures.
Ground 2: Was there eligible expenditure “on the provision of” plant and machinery?
The Appellant argued that expenditure on the delivery and installation of plant and other parts necessary to make plant functional qualifies under plant allowances. Apart from the plinths, ‘The Respondent erred in not accepting expenditure on different items was not on the provision of plant‘, claimed The Appellant. The Respondent’s counter-argument was that expenditure on the premises which allows plant to be usable was expenditure on the premises and not on plant. The FTT elaborated expenditure on stairs, access platforms and hatches were all ‘too remote from the relevant items of plant‘. It is accepted by The UT that there was no error of law and thus appeals for these items were rejected.
However, a review on the expenditure of walls and slabs in the Vaporisation Facility and the access hatches in the Kiln Facility were made also. The Respondent decided that the Vaporisation Facility is ‘part of the setting in which the Tails are processed’. However, The Respondent did not specifically identify whether the supporting walls and slab in the Vaporisation Facility were not plant, or whether the expenditure was not on the provision of plant. Despite this, their decision to reject The Appellant‘s appeal, which the expenditure qualified as plant due to it making the plant usable, indicates that it was reached on the basis that expenditure was not of the provision of plant. Due to this, The UT concluded The Respondent erred, as they considered ‘it misdirected itself as to the law’.
The decision to reject access hatches in the Kiln Facility was not challenged by The Appellant. The Respondent claimed the purpose of the hatches was to allow kiln filters to be replaced, which had no contribution to the relevant trade. There is no error in law in this regard.
Ground 3: Was the Disputed Expenditure on the Provision of a Building?
Whilst FTT considered the relevance of both characteristics and functions of an asset, the UT concluded that its application of this principle erred in law in certain respects. The FTT failed to consider the various potential everyday meaning of the term “building”. It failed to provide various analysis which adopts the widest meaning of the term “building” rather than everyday meaning. It also emphasizes the physical appearance of the building which were consistent with the functions of a building.
The UT’s view was that the physical characteristics that define “building” under Section 21 should not be the primary determinant in considering if an asset is disqualified from being plant. Therefore, the FTT erred in law in deciding that Section 21 applied to prevent all the disputed expenditures from being eligible for plant and machinery allowances.
Ground 4: Was Expenditure on Buildings Saved by Item 22 of List C?
The Appellant argued the disputed items were saved by item 22 of List C. Although The Respondent accepted that the purpose of the expenditure of these disputed items was plant and machinery, it rejected The Appellant’s appeal as the alterations of land was not for the sole purpose of installing plant or machinery – The Appellant also had other purposes, ‘(the structures) were constructed in part at least to protect operatives, the public and the environment and to provide premises which house the plant and machinery’.
The UT agrees with the FTT, thus, there was no error in law made by The Respondent and The Appellant’s appeal was ultimately rejected.
Ground 5: Was Expenditure on Buildings Saved by Items 1 or 4 of List C?
The Appellant argued the expenditure on the disputed items were saved by Items 1 or 4 of List C.
The Appellant claimed that The Respondent should interpret “on any item” in section 23(3) as “on the provision of any item”. The Respondent and UT both rejected this argument as they believe the wording of section 23 is plain – Items 1 to 16 do not specifically contain the word “provision”, along with the knowledge that the drafter of the legislation would have been aware of the distinction between expenditure “on” and “on the provision of”, but chose to specifically word it with the former. Thus, the appeal was dismissed.
Ground 6
This ground was not ‘the subject of separate oral submissions’ by the Appellant and will be dealt with separately as to the overall plant and machinery available for the disputed expenditure.
Conclusion
The UT decided that this case be remitted to the FTT. They will have to remake their decisions based on the reasoning and conclusions as set out by the UT decision where errors of law have been identified under Grounds 1, 2 (is so far as the walls and slab of the Vaporisation Facility) and 3 of this appeal.
As there is no statutory definition of the term “building” and assets such as these were not contemplated at the time of legislation, various case laws inevitably have to be relied upon in determining whether assets which are of civil engineering in nature can be eligible for capital allowances. Recent cases include Cheshire Cavity Storage 1 Ltd and another v HMRC [2022] and HMRC v SSE Generation Limited [2021]. These will assist in establishing precedence for future civil engineering cases.
With the recent legislation on Structures and Buildings Allowance (SBA), expenditure that is of civil engineering in nature may qualify for SBA if not considered plant and machinery. SBAs were introduced in the Finance Act 2020 which provides tax relief on a straight-line basis of 3% over 33.3 years for expenditure incurred on commercial property construction contracts awarded on or after 29 October 2018.
Lovell Consulting’s View
In our view, this is a very complex case. The UT has provided a clearer distinction and understanding on what is expenditure on building and plant. As a result of this case, a more succinct overview of the capital allowances legislation is presented, which will be a useful reference for future claims. It would have been interesting to see the level of detail that the capital allowances were presented in the original tax return. Generally we find full disclosure with costs segregated in detail helps prevent disputes with HMRC.
Another similar and interesting key case can be found on:
The full Urenco case can be found here:
