In SSE Generation v HMRC the First Tier Tribunal considered the treatment for capital allowance purposes, various parts of a hydroelectric power generation scheme at Glendoe, in Scotland. The total construction cost, including subsequent rectification works was approximately £300 million. Capital allowances were claimed on some £260 million, of which HMRC have accepted some £34 million, leaving £226 million in dispute.
At the heart of the case was the key question of what an item of plant is. Mr Brennan acting on behalf of HMRC took the view that there was no point in looking at whether the disputed items were “plant” as they were disqualified from allowances by virtue of Capital Allowances Act Section 21 (buildings) or Section 22 (structures) and therefore the legislative provisions providing exemptions under List C in Section 23 did not apply.
The appellant argued that they was a “chronological appeal” in looking at the case to establish whether the relevant items were “plant”, before looking at the statutory exclusions, and it was therefore necessary to identify the relevant piece of plant at the first stage.
The court agreed with the appellant, stating that before an item of expenditure is disallowed by Section 22 for structures, assets and works the anterior question is whether the expenditure on its provision would qualify at all under Section 11.
A further key consideration was whether the agglomeration of assets should be considered as one item or as more than one item of plant for capital allowance purposes. In this case the consideration of Section 23 List C item 22, for the alteration of land for the purpose only of installing plant and machinery, is particularly relevant. It was decided by both parties that the scheme should be viewed “on a piecemeal basis by looking at the function of each of the items in dispute”.
The principle items of expenditure considered, and their decision was:
a) Water intakes – function as plant by extracting part of the flow from the stream, rather than a reservoir which stores water [allowable in full]
b) Water conduits – function to carry utilities rather than a means of transport [allowable in full] – noting the cost of the reinforced concrete conduit was not allowable, but the cost of excavation and subsequent re-covering was allowable in full
c) Headrace – seen to perform the function of delivering water at progressively increasing pressure without leakage [allowable in full]
d) Caverns – the creation was not deemed allowable where it was found to be caught by the premises test as being the place in which the trade is carried on. Only to the extent it was expenditure on “the alteration of land for the purpose only of installing plant or machinery” was it deemed allowable [allowable in part]
e) Main access tunnel – as the primary purpose was not to carry utilities but to allow access, it was deemed not to be captured under the legislative exclusion as a structure for “a tunnel” under Section 22 List B item 1 [not allowable]. Contrast this to the turbine outflow tunnel, drainage and watering tunnels which were thought to resemble an aqueduct and therefore the expenditure was allowable.
Values split between each expenditure considered have not been disclosed. Post this case in the 2018 Autumn budget, HMRC felt the need to clarify the treatment of allowances for costs of altering land. The proposed legislative change will reinforce that allowances will only be given for the cost of altering land where it is for the purpose of installing plant and machinery. It is not intended to relieve the cost of altering land to install assets (most buildings and structures) that are ineligible for capital allowances. It is instead looking for allowances to be provided under the new Structures and Buildings Allowance, introduced from 29 October 2018, albeit at a lower rate of relief.