This is the first significant capital allowances case since IRC v Barclay, Curle & Co Ltd [1969] where expenditure on capital allowances has been considered for civil engineering type expenditure.

Of particular interest is just how far apart the two parties were.  From expenditure of £330m, HMRC initially only accepted 13% of the taxpayer’s original capital allowances claim.  We don’t normally see cases with such a disparity of viewpoints as generally recent cases such as JD Wetherspoon plc v HMRC Commissioners and Bradley v London Electricity plc have largely narrowed differences being contested.

Also of interest is how much the FTT were persuaded by the facts of the case as presented by the Managing Director of the hydroelectric facility.  In other capital allowances cases, the outcome has been more hinged on the interpretation of the legislation rather than an exposition of the facts.

The Facts

SSE Generation Limited (SSE) incurred £300m creating a new underground hydroelectric power generation scheme, with water intakes, a network of aqueducts to feed into a reservoir, concrete dam, underground headrace and tailrace, caverns housing the generating equipment and various other tunnels and conduits.   Substantial works were required to alter the land to facilitate the installations.

SSE claimed circa £260m as qualifying for plant and machinery and repairs (no allowances were claimed for the reservoir or the concrete dam).  HMRC challenged the claim and accepted only £34m to qualify for capital allowances.

SSE appealed HMRC’s position, resulting in the case being heard at the First Tier Tax Tribunal (FTT).  The parties sought a decision in principle on the various disputed items with the quantum being determined at a later stage by a Tribunal.

The FTT approached the case in a pragmatic way and considered at length the legislation and case law with the focus on the definition of what plant is.  The conclusion reached was that the item in question needs to be given its everyday meaning and considered on its function.

Most of the items in dispute were allowed on appeal apart from works in creating the main access, connection and emergency tunnels, one conduit and excavating two caverns.

Items in Dispute

The case centred on the correct interpretation of S11 (definition of qualifying activity), S21 (provision of a building), S22 (provision of a structure or other assets) and S23 (expenditure unaffected by S21 and S22).  These sections have frequently caused confusion as they are often interpreted incorrectly.  It is still a requirement to consider case law principles on whether an item is equipment/plant used in a qualifying activity, or is it the setting – where the qualifying activity is carried on.

HMRC’s main argument was that the items in dispute (caverns, water intakes, conduits, power cavern and headrace) were disqualified from allowances by reference to either S21 or S22 or that the savings in List C of S23 did not apply.  They did not consider it necessary to determine whether the asset was indeed plant before considering S21-23.

They argued that anything that involved the alteration of land would fall into S22 (b) ‘expenditure on the provision of plant…does not include expenditure on…any works involving the alteration of the land.’

However, having considered at length the facts of the case, the FTT concluded that it was necessary to firstly determine whether the relevant items were plant under common law (used in the qualifying activity) before looking at S21 and S22, and then finally the exemptions in S23.  The key question being does the item in question function as business apparatus?  The FTT drew on IRC v Anchor International Limited and JD Wetherspoon plc v HMRC – that it is necessary to firstly identify whether the relevant piece was plant at common law.  Only if the answer to that question is yes, then S21-23 are then considered.

They accepted that the words in S22 have everyday meaning and that statutory provisions need to be very deliberately and carefully applied.  They also rejected HMRC’s argument that anything that involves the alteration of land should fall within S22 (1)(b) whether or not the structure was in S22.  S22 sets out that expenditure ‘on any works involving the alteration of land’ is disallowed.  However, as set out by the FTT Judge, the alteration of the land for purposes only of installing plant and machinery is ‘saved’ by S23, list C, item 22.  Consequently, such costs incurred qualify as expenditure on the provision of plant under the basic principles of S11.


By reverting back to the intention of the draftsman, the approach taken by the FTT is refreshing and hopefully addresses the push by HMRC to challenge claims based on incorrect reading of the statute.  Whilst the facts relate to an engineering project on a vast scale, the conclusion reached by FTT will have wider implications for all taxpayers undertaking projects and claiming capital allowances.  Time will tell whether HMRC appeal this decision.

This case will potentially impact on large scale civil and structural engineering projects including tunnels, roads and power plants.

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