Whether expenditure relating to land qualifies for capital allowances

Mon 20 Aug 2018

The First Tier Tribunal (FTT) has partially allowed claims by SSE Generation Limited (SSE) that expenditure incurred in construction and rectification works on an underground hydroelectric power scheme qualified for capital allowances.  The case is a helpful summary of the principles to use in identifying expenditure that can qualify for plant or machinery capital allowances.

The main learning point from this case is that it may sometimes be possible to claim capital allowances on expenditure fitting the description of an item of expenditure  in CAA 2001 s22 on excluded structures, assets and works, by assessing that expenditure in the light of basic capital allowance principles and case law.  Please get in touch with a member of the Mazars corporate tax team for further information on this case.

Background

The case concerned £300m of expenditure on the construction of a hydroelectric power generation scheme at Glendoe, near Loch Ness in Scotland, on which claims for capital allowances on £227m were in dispute concerning the following areas:

• 17 main and 8 minor water intakes used to collect water arising from a 75km catchment area.
• A network of conduits of 12km channelling this water to a reservoir.
• A 6.2km long, 5m wide ‘headrace’ carrying the water downward under increasing pressure.  This is entirely underground and was created using a boring machine.
• A ‘power cavern’ housing the turbine and power generation equipment.  It is a man-made void, excavated from the solid rock, of maximum dimensions 47 metres in length, 20 metres in width and 33 metres in height, and is some 250 meters below ground level.
• A much smaller ‘transformer cavern’, set off to the side of the power cavern.  This housed the transformer that stepped up the voltage for transmission to the National Grid.
• A ‘tailrace’.  After the pressurised water has served its purpose in the turbine, it runs away through the tailrace, a conduit a little over 2 km in length which leads into Loch Ness.  The tailrace was constructed by “drill and blast” for the first 340 metres of its length from Loch Ness and was bored for the remainder of its length by the same tunnel boring machine as created the headrace.
• A number of access tunnels which form parts of the underground works – to provide vehicular access, carry electrical cables, ventilation ducting, housing for water tanks for fire hoses, and to carry ‘spent’ water.

There were arguments on general principles and specific points. The arguments on general principles were:

• SSE argued that all the items were plant unless specifically disallowed by CAA 2001 s21 (expenditure on buildings) or s22 (expenditure on structures and works involving the alteration of land – which includes tunnels, aqueducts, dams, reservoirs, generators and other equipment associated with a reservoir) and not saved by s23 (items unaffected by s21 and s22 – which includes item 22 – expenditure on altering land for the purpose of installing plant or machinery and item 25 – expenditure on the provision of pipelines, tunnels and underground ducts with the primary purpose of carrying utility conduits).
• HMRC argued the disputed items were not plant and were excluded by CAA 2001 s21 and s22 and not saved by s23.

The FTT noted that the main area of dispute between the parties was as to the point at which “plant” with which the business is carried on becomes “setting” or “premises” in which it is carried on. In order to determine that point it was necessary to go back to the body of case-law, as there is no legislative definition of ‘plant’ for capital allowance purposes.

The FTT considered that the many of the items of expenditure detailed above were either not excluded by CAA 2001 s21 and s22, or were saved by items 22 or 25 of s23. However, it considered expenditure on conduits which had been concreted over and enclosed to be aqueducts were not saved by any capital allowance provision and so were excluded.  The expenditure on the power and transmission cavern was considered to be excluded works on the alteration of land (CAA 2001 s22(1)(b)) and not the alteration of land for the purpose of installing plant.  Once the caverns had been constructed, however, additional expenditure in order to install plant and machinery did qualify.  The main access tunnel and connecting access and emergency tunnels were considered to be non-qualifying tunnels on their own or with a dual purpose whose primary purpose was not to act as a utility conduit.