Court of Appeal Decision – Capital Allowances Tax Case Regarding Disputed Expenditure on the Structures of an Enrichment Plant
The Court of Appeal (Civil Division) has published its decision on the case of Urenco Chemplants Limited and Urenco UK Limited v HMRC [2002] EWCA CIV 1587.
It overturned decisions made by the Upper Tier Tribunal (UTT) and interestingly stated that it considered the drafting of a section of the CAA2001 legislation (relating to ‘List C’ of Section 23 CAA2001) did not reflect the same provision made in the Act’s precursor of CAA1990. The conclusions it reached were therefore based in part on the 1990 CAA act.
Overview
In 2018, Urenco (The Appellant) constructed a £1bn specialist facility at Capenhurst in Cheshire. The facility was used for the enrichment of uranium and the “deconversion” of the radioactive, corrosive, toxic and unstable by-products. A capital allowances claim was made in relation to the specialised facility. The treatment for capital allowances purposes of most of the expenditure was agreed between Urenco and HMRC but disputes remained in relation to circa £192m of expenditure. Urenco took the case to the First Tier Tribunal (FTT).
On 07 August 2019, the FTT dismissed The Appellant’s appeal in claiming capital allowances on certain disputed expenditures amounting to £192m. The FTT found that most of the expenditure was not incurred ‘on the provision of plant and machinery’ and that most of the expenditure was deemed, in their opinion, to being on ‘the provision of a building’.
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 there were material errors of law in the FTT’s decisions. It overturned some of the decisions in the taxpayer’s favour. The UT remitted the case back for further consideration.
Both sides appealed the UT’s decision and the case was heard at the Court of Appeal. The judgement was handed down on the 1st December 2022.
Court of Appeal Conclusion
Both parties appealed.
HMRC appealed on 3 decisions reached by the UT, and the Court of Appeal allowed all 3:
- The UT was wrong to override the FTT’s decision that most of the disputed items did not constitute ‘plant’ for the purposes of section 11 of CAA 2001 (General conditions as to availability of plant and machinery allowances).
- The UT was wrong to conclude that the expenditure incurred on walls and first floor slab of the vaporisation facility was ‘on the provision of ‘ plant and machinery and instead the Court of Appeal agreed that they were deemed to be part of the specialised setting within which the items of equipment operated
- The UT was wrong to set aside the FFT’s decision on whether the disputed expenditure was on the provision of a building. No error of law had occurred by the FTT – decisions made were merely conclusions reached having evaluated the facts.
Urenco appealed on 2 grounds and the Court of Appeal, the first being allowed and the second dismissed:
- The Court of Appeal agreed with Urenco that Items 1 and 4 of List C applies to expenditure ‘on the provision of’ those items and not merely ‘on’ (as found by the UT).
- Urenco had appealed that the UT had made a mistake in deciding that Item 22 List C – ‘the alteration of land for the purpose only of installing plant and machinery’ did not apply to the disputed assets. The Court of Appeal agreed with the UT that Item 22 List C did not apply and Urenco’s grounds of appeal were dismissed.
Drafting Error – CAA2001 Rewrite
As part of The Court of Appeal’s decision, they also concluded that there was, in their opinion, a drafting error in the tax law rewrite project. Unintentionally, they had narrowed the scope of List C Section 23 CAA2001. Items 1 – 22 of List C simply lists assets, whilst Items 23 – 33 expressly refer to expenditure ‘on the provision of’ such assets – which is a much wider definition and permits allowances to be claimed on ancillary costs (e.g. transport costs). The Court of Appeal agreed with Urenco the wider definition of ‘on the provision of’ should be applied to all items of expenditure in List C.
Lovell Consulting’s View
In our view, this is a very complex case concerning the question of plant versus premises. There is no statutory definition of the term ‘building’ and consequently fundamental tests – the function test and the premises test – have been built up over decades of case law. Recent cases have focused on the distinction (including Cheshire Cavity Storage 1 Ltd and another v HMRC [2022] and HMRC v SSE Generation Limited [2021]). However, as shown with the arguments made and decisions reached by the 3 different levels of the Courts / Tribunal services that heard the Urenco case, the debate as to what is plant versus premises is still continuing.
The Court of Appeal’s decision that assets falling under List C include costs ‘on the provision of’ will provide certainty to taxpayers and increase the scope of what can be included within the claim for plant and machinery allowances.
We would recommend seeking specialist advice from capital allowances experts for any taxpayers who are embarking on large projects to ensure that costs are segregated and claims fully disclosed in the tax return.
