While the majority of Capital Allowances claims are made for businesses and trades, it is also possible for employees to claim Capital Allowances on plant and machinery. A recent UK First Tier Tribunal (FTT) case highlights the complexities of such claims and the hurdles that have to be cleared in order for claims to be successful.
Capital Allowances for Employees; the Principles
Although not widely known (and seldom claimed), Capital Allowances can be claimed by employees on plant and machinery used to fulfil work duties, as the Capital Allowances Act (CAA) 2001 s.15 (i).
There are restrictions that the employee cannot claim for expenditure on cars, bicycles or any mechanically propelled road vehicle. Further, the plant and machinery is only qualifying if it is ‘necessarily provided for use in the performance of the duties of the employment or office’ (CAA 2001 s.36).
Telfer vs HMRC  UKFTT 614
Mr Telfer was employed by the Caravan Club as an assistant warden starting in 2007 until 2012. Under the terms of the employment contract, it was agreed that“… it is a requirement that all Wardens reside on Site throughout the duration of their Agreement…” and “Wardens will normally live on site in their own caravan/motor home on a pitch provided for them”.
Mr Telfer was therefore required to live on site in order to fulfil his duties. During his employment, Mr Telfer purchased two caravans each costing around £20,000 in order to meet this requirement. Mr Telfer claimed Capital Allowances on the expenditure incurred buying the caravans, which HMRC rejected.
Mr Telfer’s case to the FTT was that he, as an employee of the Caravan Club, carried on a qualifying activity and incurred qualifying expenditure on the two caravans for the purposes of his employment.
HMRC’S case was that Mr Telfer’s purchase of the caravans was not necessary for him to fulfil his work duties and therefore the expenditure fell afoul of the test provided under CAA 2001 s.36.
Further, HMRC referred to CAA 2001 s.21, s.22 and s.23. For context, s.21 and s.22, list buildings and structures and refuses claims for assets on the two lists. However, s.23 provides another list of assets and states that such assets are not automatically excluded as qualifying plant and machinery by s.21 and s.22.
HMRC argued that as ‘caravans provided mainly for holiday lettings’ were listed as Item 19 of List C CAA 2001 s.23, then it would be reasonable to assume that some caravans would also be excluded automatically by s.21 and s.22. HMRC substantiated this by stating that expenditure on a caravan occupying a fixed site that did not move regularly for the course of a trade or employment would be excluded as qualifying pursuant to s.21 or s.22.
HMRC’s last objection to Mr Telfer’s claim was that the caravans were not plant and machinery when precedent case law tests and principles were applied. HMRC cited Benson v Yard Arm Club Limited (1975-81) to support this point.
As seen above, Mr Telfer’s case for making a claim on the two purchased caravans was simple. He had seemingly met the first principles of any claim for plant and machinery allowances; namely he had carried on a qualifying activity as an employee of the Caravan Club and had incurred qualifying capital expenditure on the two caravans (CAA 2001 s.11 and s.15).
HMRC’s case on the other hand was complex and brought up three main ‘hurdles’ which they believed Mr Telfer’s claim could not traverse; ultimately the court considered that Mr Telfer’s claim successfully negotiated two of these before failing at the last.
Hurdle 1 – The “Necessarily Provided” Test
As described above, expenditure on plant and machinery by an employee is only qualifying if it is ‘necessarily provided for use in the performance of the duties of the employment or office’ as CAA 2001 s.36.
HMRC believed Mr Telfer’s claim failed this test as the caravans were essentially purchased as contractually agreed with his employer and not because his duties required the provision of the caravans.
However, the Court found that the caravans were needed by Mr Telfer in order for him to reasonably fulfil his employment duties. His duties were to be on site at all times and move to another site quickly if required by his employer. The provision of a caravan by Mr Telfer was to be able to perform these duties.
The courts findings on this matter seem fair and reasonable. In order to perform his duties as per his employment contract, it is reasonable that Mr Telfer would need to provide and live on site in a caravan. Further, the caravans purchased were not “cars, bicycles or… (a) mechanically propelled road vehicle” and therefore do not fall afoul of the provisions set by CAA 2001 s.36.
Hurdle 2 – Buildings, Structures and Caravans
HMRC believed that the inclusion of caravans for holiday lettings within CAA 2001 s.23 meant that it was reasonable to assume that other caravans could be considered buildings under s.21 or structures s.22. The example submitted by HMRC was that a caravan occupying a fixed site that did not move regularly for the course of a trade or employment could be excluded as qualifying under s.21 or s.22.
The Court found that neither s.21 nor s.22 had any application in the case. The Courts found that the caravans were not buildings under s.21 nor were they fixed structures under s.22. The essence of the caravans was that they were movable. Neither of the lists of assets located at s.21 or s.22 explicitly includes caravans.
The point raised by HMRC is quite bizarre and it is questionable why this was submitted at all. As the courts found, the caravans by their very nature were movable and indeed could be moved by Mr Telfer to different sites in order to fulfil his employment duties. The application of sections 21, 22 and 23 was misguided and HMRC’s reasoning was flawed. Common sense prevailed in this instance.
Hurdle 3 – the ‘Functional’ Test
HMRC submitted that fundamentally the caravans could not be considered to be plant when precedent case law tests and principles were applied. As discussed above, HMRC cited Benson v Yard Arm Club Limited (1979) to support this point.
The Court agreed with HMRC and considered the caravans did not rank as plant. The court applied the ‘Functional test’ set out in Benson v Yard Arm, which considered whether a ship used as premises for a restaurant functioned only as the premise or was plant performing a ‘function’ in the trade. The Court found that although Mr Telfer could not legally, under his employment contract, or realistically perform his employment duties without the caravans, the caravans played no part in the carrying out of his duties and therefore fail the functional test and cannot be considered plant.
It is unfortunate that Mr Telfer’s claim fell at the last hurdle presented by HMRC however the application of the functional test and the court’s findings are reasonable based on the precedent case law. The caravans, in this instance, quite clearly fail the functional test and function as premises rather than apparatus by means of which Mr Telfer’s duties were carried out.
Can a Caravan be ‘Plant’?
It should be noted that whilst Mr Telfer’s caravans were held not to be ‘plant and machinery’ in this case, this does not mean that all caravans are ineligible.
In the example given by HMRC in Telfer vs. HMRC, caravans used for holiday lettings form part of List C under CAA 2001 s.23. However, this doesn’t guarantee the asset is qualifying, rather it means it is not automatically non qualifying.
However, HMRC’s own Capital Allowances manuals state that “A caravan is plant if it does not occupy a fixed site and is regularly moved as part of normal trade usage”. Further HMRC’s advice is “…Accept that a caravan, which is provided mainly for holiday lettings on a holiday caravan site, is plant whether it is moved or not” (HMRC Internal Manual: CA22100).
So whilst Mr Telfer’s caravans were not plant, certainly caravans used by businesses or individuals for holiday lettings could be claimed for plant and machinery allowances.
Whilst at first glance, Telfer vs. HMRC seems to be a fairly insignificant case, it does serve as an example of the fundamental complexities of claiming Capital Allowances and not only by employees.
‘Plant and Machinery’ in the context of Capital Allowances has no definition in statute or legislation; the term and what is qualifying under the term has been moulded by case law and development of statute. It is not enough to just consider the asset and its characteristics; how a taxpayer currently uses and intends to use the asset is of paramount importance.
To consider whether an asset will qualify it is vital that knowledge of precedent case law tests and the legislation is understood; otherwise a claim could be rejected.
Capital Allowances can be claimed by businesses, trades and employees alike but all claims need to be considered on their own merits with a sound understanding of the Capital Allowances legislation and case law history needed for claims to be successful.
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