Two recent tax cases have tested the question of allowability of the tax relief attributable to building costs.
The first case related to costs incurred by the Elliot Balnakeil partnership in 2010-12. This Scottish farm had a history going back for over a century. The partners spent some £929,000 (net of deducting grant aid and an improvement element) on renovating an ancient and dilapidated manor house and ruinous bothy, with a view to using the buildings for upmarket holiday lettings. The renovation costs were claimed as a farm expense; HMRC disagreed with the treatment and brought the case to the First Tier Tribunal in May 2021.
Various matters made the case less than straightforward, including the dissolution of the partnership, the listed status of the house and the compulsory repair order from the local authority. The partners had also used the VAT chargeability of the works as a convenient shorthand for the repair element, which HMRC rather harshly also contested. However, the main thrust of the debate turned around whether or not the work was a repair, and, if so, was it wholly and exclusively incurred in the course of the farming business?
Farming, of course, is a single trade, so it was not possible to argue that there was a compound trade of farming and tourism. In the words of the tribunal chairman “the trade in question was…in livestock farming…the disputed expenditure was for a new trade in furnished holiday letting. Consequently, there was no alignment between the trade in question and the purpose of the expenditure under appeal for the test of ‘wholly and exclusively”.
The deductibility of the costs against the farming trade was, in any event, irrelevant. The tribunal looked at similar cases and decided that the nature and extent of the works were so extensive that “the House was transformed from being a farmhouse of minimal facilities and not fit for modern living…to being a luxury holiday home…as a fact therefore…both the House and the Bothy have changed their overall character”. The circumstances were, therefore, more closely aligned with Law Shipping v CIR than the Odeon Associated Theatres Ltd v Jones case.
The case of JRO Griffiths Ltd v HMRC heard by the FTT in July 2021 ends rather more happily for the taxpayer. This case related to capital allowances on a potato store. There are considerable similarities with the grain store in the 2019 case of May v CIR. In the Griffiths case, the potato store, like the May’s silo, was specially constructed for the job and unsuitable for general agricultural use, the structure itself working towards not only storing but also drying and conserving the potatoes between harvest and delivery.
HMRC were prepared to give relief on the machinery within the structure but sought to disallow, effectively, the element which could be considered the building within which the potatoes were processed. The FTT disagreed, agreeing with the taxpayer that the entirety was a silo, which definition could include a store for roots as well as cereals, and was also a cold store. In both respects, therefore the whole structure was a piece of plant and eligible for capital allowances.
Following on from the precedent in May, the Griffiths case seems to establish that modern purpose built vegetable stores which go beyond mere premises to hold crops before delivery may well fall within the definition of “plant” rather than “buildings which contain plant”. Whilst Annual Investment Allowance remains at a generous level, this treatment can give a significant and timely tax incentive to invest.
*The views expressed are the author's and not ICAEW's.