CHESHIRE CAVITY STORAGE 1 LIMITED and EDF ENERGY (GAS STORAGE HOLE HOUSE) LIMITED V HMRC [2019]
FIRST TIER TRIBUNAL TAX CHAMBER (FTT)
Background
Both appellants were companies in the EDF Energy PLC Corporate Group and they operate gas storage facilities on adjoining site is Cheshire. The Companies used underground cavities filled with brine to store gas and incurred costs to de-brine the facilities. In addition EDF incurred costs creating further gas cavities by a process of leaching and de-brining. The Companies claimed Capital Allowances on these costs.
HMRC accepted that related costs for boreholes, pipework, pumping and dehydration equipment and control mechanisms qualified for plant and machinery allowances. The dispute was over the cost of preparing the cavities themselves as HMRC disallowed the Capital Allowance claims for both companies and both companies appealed.
FTT Decision
The FTT dismissed the appeals finding that:
The gas storage cavities were not plant and whilst they were central to the appellants’ business that did not in itself make them plant as premises and plant can both be essential.
The cavities were not merely fixed to the land but were part of it, this did not rule out the possibility that they were plant, the matter depended on whether the cavities functioned as premises or as plant. The function of the cavities was to store gas in such a way that it did not dissipate and that it remained in a useable condition. The cavities did have a plant like function but that was an incident of the construction and not the reason they were constructed in the manner they were and there was no evidence that their functioning in a plant like manner was essential.
The appellants business was the storage of gas, however short term, and storage is a premises like function and not a plant like function, and shelter and containment was the significant and predominant function of the cavities.
On the basis of the above reasoning the tribunal held that the cavities were not plant, which was enough to dismiss the appeal. However for completeness the tribunal went on to consider the restrictions of CAA 2001 s22 and were also not saved by List C, the Tribunal said that:
List B and C were not intended by Parliament to be a test of function, they were intended as qualifications on what case law had found to be plant, which was a functional test. The lists were definitive and could not be used by analogy, e.g. it could not be said that the cavities were within List C because they were like storage tanks, for the list to apply they must be storage tanks.
The exemption at List B for structures “in use for the purposes of an undertaking for the extraction, production, processing or distribution of gas did not apply as the cavities were being used to store gas.
The cavities were not storage equipment, cold rooms, silos or storage tanks (all items on list C) nor were they created for the installation of plant and equipment.
Lovell Consulting View
This is another case on the meaning of plant and as is often the case the asset itself will be of limited relevance to most taxpayers but the points raised will be of much wider interest, in this case particularly for those trades that involve storage.
The difficulties in defining plant almost always revolve around whether the asset in question is merely or primarily part of the premises within which the business is performed or whether it is apparatus with which the business activities are carried on.
The starting point for the discussion is Yarmouth v France (1887) in which the term plant was defined to include “whatever apparatus is used by a business man for carrying on his business – not his stock-in-trade which he buys or makes for sale; but all goods and chattels, fixed or moveable, live or dead, which he keeps for permanent employment in his business”
The courts have sometimes discussed a functionality test but it comes back to the same question: is the asset functioning as plant or as premises?
The test must always be applied by looking at the function of the asset in the context of the particular business concerned.
In this particular case the tribunal determined that the appellants were not in the business of either processing or distributing gas but only storing gas. This was a complex case where there appear to be genuine disagreement between the parties but the distinction between being an ‘incident’ of the storage or the ‘purpose’ of the storage was fundamental to the argument.
In our view this brings out the importance of gaining clarity on the underlying processes involved, ideally long before the case comes to tribunal. Also it highlights the careful attention required to fully segregate building costs.
