When is capital expenditure classified as plant or machinery or an excluded structure or building for tax?

Mon 18 Nov 2019

The Upper Tribunal (UT) decision in SSE generation is a helpful decision in clarifying the capital allowance distinction between ‘plant & machinery’ and ‘buildings and structures’. HMRC’s appeal against the previous First Tier Tribunal (FTT) decision (see here) was rejected, so that a range of disputed expenditure (including tunnels and aqueducts) associated with a hydro-electric power generation scheme was deemed to be plant or machinery.

Reference to this case and also an earlier case involving London Electricity plc may be relevant in a number of commercial circumstances particularly involving infrastructure. For a further discussion on the identification of plant or machinery for capital allowance purposes, please get in touch with a member of the Mazars corporation tax or personal tax teams.

Whether there is an exception to a structure being disqualified by CAA 2001 s22

A point that the UT addressed was the FTT decision that despite certain expenditure being in list B within CAA 2001 s22 (for example as prohibited aqueducts or tunnels) it was allowable as plant and machinery being under one of the items in CAA 2001 s23 list C. The relevant items in list C were item 22 “The alteration of land for the purpose only of installing plant or machinery” and 25 “The provision of pipelines or underground ducts or tunnels with a primary purpose of carrying utility conduits”. The UT disagreed with the FTT and considered that the particular expenditure incurred was in fact within the category of an industrial structure and therefore fell within the exception to the definition of structures within CAA 2001 a22 list B item 7(a). As a result it was not necessary to consider CAA 2001 s23 list C. 

Whether the expenditure performs a function or represents premises from which the business is carried on

In this context it might also be relevant to reconsider why underground substations were held not to qualify as plant in the case of Bradley (Inspector of Taxes) v London Electricity plc – [1996] STC 1054 (you can look this up on Lexis Nexis or CCH). In that case the expenditure was deemed to represent the premises from which the trade was carried on, rather than plant or machinery – no specific plant like function was identified for the substation as a whole.

An extract from the High Court decision in London Electricity is:

“In my judgment the Special Commissioner failed to ask himself what plant-like function the structure as an entity performed in London Electricity’s trading activity. If he had, the true and only reasonable conclusion he could have come to was that the structure functioned as the premises in which London Electricity’s trading activity is carried on rather than the apparatus with which it was carried on. No plant-like function was identified for the structure as a whole. As Mr Furness submitted, the particular features of the substation structure which the Special Commissioner identified in his decision do no more than indicate that the substation was purpose-built to enable the plant within to function. The structure, that is to say the external and internal walls and floors, the roof, foundation piles and the other items, the expenditure on which the Crown was not willing to allow, are in truth the premises within which London Electricity’s trading activity is carried on. The fact that features of the structure were carefully designed to accommodate the equipment within does not convert what is otherwise plainly the premises in which the activity is conducted into the plant or apparatus with which that activity is conducted. “