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14 Jan 2025

Case Law – Mersey Docks & Harbour Company v HMRC

HMRC continue to raise enquiries and to disallow items of plant that could be used for a claimant’s trade.

The First-Tier Tribunal (FTT) were asked to consider whether plant & machinery allowances (PMAs) were available in respect of expenditure on the construction of a quay wall at the Port of Liverpool as shown in the youtube video Liverpool2 Construction.  The appeal by the taxpayer was successful.

The quantum of claim was £57.1million submitted in year-end period 31 March 2015 to 2018 for the development of a new deep water container terminal for larger vessels.

HMRC argued that PMAs were excluded by virtue of structure assets and works under section 22 Capital Allowances Act 2001 (CAA 2001) under list B item 5 for ‘a dock, harbour, wharf, pier, marina or jetty or any other structure in or at which vessels may be kept…”.

The burden of proof rests with the taxpayer, Mersey Docks to demonstrate that HMRC is wrong to disallow the expenditure and argued that the expenditure falls under sections 23 CAA 2001 which provides that certain expenditure under list C is unaffected by section 22, namely:

  1. Item 1 – Machinery not within any other item in this list
  2. Item 22 – The alteration of land for the purpose only of installing plant or machinery
  3. Item 24 – The provision of any jetty or similar structure provided mainly to carry plant or machinery

In reaching a decision, the FTT considered the principles raised in two cases, the most recent being Gunfleet Sands Ltd v HMRC (ADD Link) and whether the quay wall should be regarded as having a distinct identity or whether it should be regarded as part of a larger container transition area (CTA). Secondly, IRC v Barclay Curle & Co (ADD Link) which looked at the construction of a dry dock and whether the quay wall was apparatus with which the trade was undertaken or the premises where the trade was carried on.

In summary, the FTT favoured the tax payer stating that the quay wall “expenditure is expenditure on installing machinery, namely the STS cranes’.

Veritas Advisory’s view on the decision is that this case further demonstrates the importance of understanding the context of the expenditure in relation to the qualifying trade of the claimant, as well as how the items of plant & machinery are installed which can often lead to significantly increased claims.

Note that Veritas Advisory are aware of more enquiries being raised by HMRC into capital allowance claims and it is therefore, vital that the taxpayer seeks specialist capital allowances advice to ensure submitted claims are fully auditable, with the entitlement basis completed and fully justified, when submitted.

Insights
20 Dec 2024

Case Law – Changi Airport Loses $273m Tax Break

Changi Airport Group (CAG) made Capital Allowances claims over three years totalling $272,575,162 on assets including the runways and taxiways but lost with the Court of Appeal determining that the assets were structures and not tools of trade.

The legislation in Singapore closely follows that of UK Capital Allowances Act 2001; the case highlights the difficulty in defining what ‘plant’ is with there being no statutory definition of plant.

The appellant was Changi Airport Group (Singapore) Pte Ltd, a Singapore-incorporated company with its principal activities being the operation of Singapore’s main airport. The asset in dispute was the ‘RTA’, which comprises two runways, various taxiways and aprons. Changi Airport Group claimed allowances for machinery or plant on the capital expenditure incurred on the RTA. However, while the Comptroller of Income Tax (the Singaporean authorities’ version of HMRC) agreed that the RTA has specifically designed features intended to facilitate safe landing, taxiing, and take-off of aircraft, they only granted ‘slower’ industrial building allowances on the basis that the RTA are not ‘plant’ but ‘structure’. Changi Airport Group disagreed with this determination and appealed the decision.

Changi Airport appealed the case on multiple grounds, arguing that the RTA played a role in their business and that the aerodrome apparatus installed on the RTA is indivisible from the RTA. They also argued that the Board erred in applying both local and foreign cases, including Schofield and Barclay Curle.

The Court accepted that the RTA facilitates the safe landing, ground movement and take-off of aircraft. However, they sided with the Comptroller in finding that these functions are performed by the aerodrome equipment, such as the airfield lighting system, instrument landing system, signs and aircraft docking guidance system, for which Capital Allowances had been granted, and that although the aerodrome equipment is not designed to work without the RTA, the RTA continues to function even in the absence of the aerodrome equipment. That the RTA is a purpose-built structure that must be durable enough for aircraft to land, traverse, and rest also does not render it ‘plant’.

In line with UK legislation, the Singapore Income Tax Act does not provide a definition of ‘machinery or plant’ as such.  Instead, the Inland Revenue Authority of Singapore frequently adopts UK case law on the meaning of ‘plant’ in its technical guidance. As suggested in the Changi Airport case, these cases provide nuance and principles which may assist the court in assessing whether an asset has the qualities of ‘plant’.

Although it might not be common, capital allowances cases in the UK have a long history of adapting overseas cases in the judgments, such as Wangaratta, an Australian case about a dyehouse, and Waitaki, a New Zealand case about a cold store. It will be interesting to see if the Changi case is relied upon in any future UK case and in which direction. While whether this case has any impact by analogy in the UK courts remains to be seen, taxpayers will find it informative when making decisions on where the plant-structure divide sits for their particular situation.

Insights
07 Nov 2024

Furnished Holiday Lets – HMRC Clarify Legislation

The window to claim Capital Allowances tax relief on Furnished Holiday Lettings (FHLs) is fast closing before repeal of the legislation in April 2025 and HMRC have now clarified the transitional rules about who can or can’t claim.

  • Expenditure must be incurred by April 2025
  • Existing FHL businesses can keep claiming existing allowances beyond April 2025
  • For new FHL businesses in year end 24/25 the occupancy conditions begin on the day that letting commences

For example, where a property is first available for letting on 1 January 2025 the relevant period for occupancy rules will be 1 January 2025 to 31 December 2025 and applies to both individuals and companies.

This allows FHL owners to take advantage of the tax relief available on property purchases which can equate to circa 20% of the purchase price, often overlooked by FHL owners, in addition to allowances available on developments and refurbishments.
Insights
04 Oct 2024

New Case Law – Capital v Revenue

A recent important Supreme Court decision in Centrica Overseas Holdings Limited v HMRC addresses the deductibility of expenses incurred by a company.

The decision puts beyond doubt that such expenses may be non-deductible by virtue of being capital in nature. Until recently it was generally thought that transaction-related expenses should, if incurred before a firm decision is taken to proceed with a specific transaction on specific terms, usually be deductible expenses of management. The Supreme Court has now confirmed that a more nuanced approach is required, to establish whether the expenditure is capital or revenue in nature.

The Centrica case concerned the treatment of an aborted transaction and the financial, legal and other advisory costs it sought to deduct as expenses of management. The Supreme Court noted ‘expenditure on an abortive capital disposal transaction is capital nonetheless’, and so it does not matter that there may be uncertainty as to whether a proposed transaction will proceed to a successful conclusion.

We have often seen costs such as professional fees related to a development, acquisition or disposal be treated as deductible costs by clients and their accountants where they are deemed to be abortive costs. This judgement demonstrates that the bar for obtaining deductions has been raised considerably.

Insights
04 Oct 2024

HMRC To Increase Scrutiny on Capital Allowances Claims

Receiving accurate and professional Capital Allowances advice has never been more important.

Not only are Allowances more advantageous than ever before, but HMRC are strategically targeting tax leakage – including through Capital Allowances – with plans to recruit 5,000 additional compliance officers over the next five years.

Capital Allowances rarely stand still. Chancellors can’t seem to resist tinkering, and adjustments to Capital Allowances have been included in every Finance Act since the current legislation was introduced in 2001.

Facing budget cuts stemming from the Global Financial Crisis and struggling to keep tabs on non-compliant claims, restrictions introduced in 2012 and 2014 were designed to make HMRC’s job of policing the legislation easier.

In reality, all the changes accomplished was to create more rules for ill-informed or badly-advised taxpayers to overlook.  Consequently, many Capital Allowances claims over the past few years have gone unchallenged by HMRC, despite not being in adherence with the legislation.

HMRC devoted a lot of its staff and resources to monitoring the Coronavirus Job Retention Scheme and other targeted pandemic recovery reliefs and incentives.  As that work tails off we can expect to see existing staff – plus a share of the 5,000 new recruits – deployed to other areas.  None are more topical or high-profile right now than Capital Allowances.

Already we have seen a notable uptick in enquiries into Super Deduction and Full Expensing claims, after many years of claims being nodded through.  This increased activity is very welcome – we’ve long called for a higher level of scrutiny into Capital Allowances claims to weed out some of the unscrupulous advisers operating in the market.

Typical examples of errors (let’s be diplomatic and call them “mistakes”) that we’ve come across include:

  • Incorrect (or no) legal basis for claiming on property acquisitions
  • Allocating expenditure to the profit and loss account despite being capital in nature
  • Claiming Capital Allowances without supporting evidence
  • Wrongly claiming Full Expensing or Super Deduction
  • Claiming structural works as main pool plant and machinery
  • Allocation of expenditure to incorrect pools
  • Claiming for assets in non-qualifying areas of mixed-use property

Capital Allowances is a complex and fluid area of tax law.  With both the value of tax relief and the likelihood of HMRC enquiry reaching historic highs, investors should seek out specialist guidance from advisors who are professionally qualified.  This is the only way to benefit from the full incentive without overstepping the mark.

Insights
09 Sep 2024

100% Full Expensing – What is it and why it’s important

Hailed as the “Greatest Tax Break in History” when it was introduced in 2021, the 130% Super Deduction aimed to take some of the sting (and the negative headlines) away from the hike in Corporation Tax rate that was announced in the same speech.

Sadly unlike the CT increase, it was only ever going to be temporary.  Its replacement, Full Expensing (FE), took over in April 2023 as a slightly less headline-grabby 100% First Year Allowance.

In simple terms, “Full Expensing” means that if a company buys a qualifying asset, the full cost of that asset can be deducted from its taxable profit.  You may spot that the change from Super Deduction to Full Expensing isn’t nearly as significant a downgrade as it may seem.  In cash terms, 130% relief at a tax rate of 19% is pretty much identical to 100% relief at 25%.

In effect, the cost of the investment is reduced by a quarter. 

An alternative way of looking at it is that the payback period for the investment is reduced.

Alongside the 100% first year allowance for main pool plant, the FE regime continues the 50% first year allowance for Special Rate Pool plant that was introduced alongside Super Deduction.

Both are considerably more helpful for cashflow than the 18% relief that preceded Super Deduction, or 6% for Special Rate assets.  Both of these reducing-balance Writing Down Allowances remain in place for some assets, for some expenditure, and for some tax payers.

When FE was first announced, it was – like Super Deduction – only a temporary measure, but with the important promise that there was an ambition to make it permanent when economic conditions permitted.  This permanence was confirmed in Jeremy Hunt’s final Budget in Autumn 2023.

Obviously there’s been a lot of water under Westminster Bridge since then, and when it comes to the new government’s first Budget in October, all bets are off for most taxes.  Back when she was in opposition however, Rachel Reeves did indicate an intention to retain the Full Expensing regime.

It deserves to survive – these tax breaks were designed to operate as an economic stimulus to stabilise the economy in the aftermath of Covid, and were prolonged to cushion the economic shock of the conflict in Ukraine.  The UK is still feeling the effect, so the underlying drivers haven’t gone away.

Fundamentally, businesses need certainty and predictability when preparing investment appraisals and financial models.  When we listen to next month’s Budget speech we are hopeful that for once, Capital Allowances will be left alone.

Insights
05 Aug 2024

Some Good News for Furnished Holiday Let Owners

The Furnished Holiday Letting (FHL) tax relief is being abolished from April 2025 meaning expenditure incurred after that date will not attract Capital Allowances tax savings.
However, positive transitional rules have been published allowing the following:
  • 100% annual investment allowances can still be claimed this year
  • Losses in the furnished holiday let businesses can be carried forward beyond April 2025
  • Existing pools of allowances as at April 2025 can continue to be claimed beyond that date

To maximise the the available tax savings we recommend the following:

  • If acquiring or improving FHLS incur as much expenditure prior to April 2025
  • Check Capital Allowances claims have ben made on all historic expenditure
  • Request advice on current and historic property purchases as many FHL owners overlook claiming on this expenditure, which can be the equivalent to 20% of the purchase price
Insights
10 Jul 2024

Case Ruling – HMRC v Altrad Services Limited

The Court of Appeal has overturned a ruling in the Upper Tribunal regarding a capital allowance sale and leaseback avoidance scheme, applying the Ramsay principle (W T Ramsay Ltd v IRC, 1982) and looking at the intention of the legislation as a whole.

The Ramsay principle posits that when a transaction comprises a series of pre-arranged artificial steps, devoid of any genuine commercial purpose other than tax avoidance, the proper course of action is to scrutinise the transaction as a whole.

The decision by the Court of Appeal will have far reaching implications in that it clearly resets the boundaries of what is a capital allowances avoidance scheme designed to increase the quantum of capital allowances claimed

Insights
06 Mar 2024

Spring Budget Update

100% Full Expensing Allowance Extended, but not just yet….

Chancellor Jeremy Hunt has today announced the extension of the 100% Full Expensing Allowance to leased assets, once fiscal conditions allow. Draft legislation will be published shortly

1 Year Left to Claim Capital Allowances on Furnished Holiday Lets

The Furnished Holiday Letting (FHL) tax regime is being abolished from 6 April 2025; draft legislation will be published soon with further details 

Freeports Tax Reliefs

Freeports tax relief has been extended until September 2031 in England and September 2034 in Wales and Scotland

Insights
24 Jan 2024

Capital v Revenue – Understand The Risks v Benefit

As we are fast approaching the self assessment filing deadline for individuals and the amendment window for corporate entities with a year end of March, understanding the importance of what constitutes capital or revenue expenditure, and the risks and benefits associated with it, is extremely important; often we see expenditure incorrectly allocated as revenue deductions.

HMRC enquiries are on the rise across the tax regimes and ensuring accuracy in your return has never been more important and the distinction between Capital and Revenue is not as simple as it may seem and with several large profile cases which have gone through varying stages of legal review focussing around the principles of like for like replacement, modern day equivalents or the concept of entirety.

Where all or large proportions of a capital project have been incorrectly allocated as a revenue deduction, the tax payer themselves could be subject to a fine of up to 100% of the “percentage of tax lost” so for instance on a £1m refurbishment, if this had previously been all classed as revenue expenditure, but actually £500k of this was capital in nature, to an individual the penalty could be upto £225k. The burden of the fine will sit with the tax payer, who have a duty of care to check their returns for inaccuracies.

Expenditure of a capital nature not qualifying for revenue deductions should instead be identified as capital allowances where possible, especially with the generous current 100% full expensing allowances, and prior to that the 130% super deduction, offering considerable tax relief.

We work with a variety of accountants and tax advisors who seek specialist advice in respect of this complex area of tax law. If you require any advice in respect of this matter then please reach out to a member of the Veritas Team who have a strong track record of correctly analysing capital and revenue expenditure on projects, and successfully negotiating these with HMRC where required to do so.