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Another ‘plant’ case, another taxpayer victory

Ray Chidell and Jake Iles of Six Forward Capital Allowances look at the implications of the 2019 May v HMRC case on capital allowances, including a look at broader considerations around the definition of ‘plant’

Cover storyAs always with court and tribunal decisions concerning the definition of ‘plant’, the case of May v HMRC (2019) TC06928 is of interest both at a specific level and because of its broader implications.

The specific interest concerns the narrow point of whether a grain silo can qualify for plant and machinery allowances. The broader question is how we should determine which other assets can so qualify – and this case still offers new insights more than 130 years after the meaning of plant was pondered in Yarmouth v France [1887] 4 TRL 1 (in a different legal context, as this was before the introduction of capital allowances).

This article begins with a refresher of the legal path we must follow when this issue arises. It then looks at the issues arising in relation to the silo, exploring the broader ramifications of the case. All statutory references are to the Capital Allowances Act 2001.

Statutory first principles

Plant and machinery allowances may be given where a person carrying on a qualifying activity incurs qualifying expenditure (s11).

There was no dispute in this case about the qualifying activity, so the concern was only with qualifying expenditure. Section 11(4) states that qualifying expenditure must be “capital expenditure on the provision of plant or machinery”.

The capital allowances rules contain no positive definition of ‘plant or machinery’. They do state, however, that “expenditure on the provision of plant or machinery does not include expenditure on the provision of a building” (s21(1)). Section 22 provides a broadly similar restriction for most structures. Both restrictive sections are, however, subject to s23.

Section 23 introduces various categories of “expenditure unaffected by sections 21 and 22”, the most important ones being integral features and a whole host of items contained within List C. This is why capital allowances claims can be considered for everything from electrical and cold water systems to trade-specific sewerage systems, heavy machinery, movable partitions and lifts, even if these items form part of the building or are structures in their own right.

Section 23 does not in itself give a positive statement that the items listed do qualify as plant or machinery, but rather removes the statutory restriction on them doing so. It is therefore always only a starting point.

For integral features, there is a separate deeming provision (at s33A)  to say that their cost is treated as expenditure on plant or machinery.

For all the List C items, however, the question of whether they qualify as plant or machinery must be considered on case law principles. In May, counsel for the taxpayer argued that “there is a strong presumption that if an item falls within a description in List C it will be ‘plant’ for purposes of the CAA”. That is a bold statement of the principle, but few would disagree with it in practice.

In short, an item that forms part of a building or structure, or indeed that constitutes a building or structure, may still qualify for plant and machinery allowances if it is rescued by s23 from any statutory prohibition and if it also qualifies as plant on case law principles. As List C was drawn up on the basis of earlier case law decisions – the intention being to say ‘thus far, but no further’ – there is every chance that an item in List C will qualify as plant on case law principles, unless there are exceptional circumstances.

Grain silos

In May, the asset under consideration was a ‘facility’ (the tribunal opted for this as a neutral term) for drying and conditioning a farmer’s grain after it had been harvested, and for storing the grain until it was sold. It was agreed by both parties that the silo was a building and that it was therefore caught by s21 unless it was rescued by s23.

Item 28 at List C removes the statutory restriction for expenditure on the provision of “silos provided for temporary storage” (and also, for completeness, for “storage tanks”).

So two questions arose: was the facility in question a silo, and was it provided for temporary storage? HMRC argued that only about 20% of the overall cost should qualify, because “the structure of the facility itself was first and foremost a ‘building’ rather than a ‘silo’ such that the expenditure on building this structure was ineligible”.

This wording is either quite clever or rather confused. The argument seems to be that the facility is caught by s21 (as a building) and also by s22 (as a structure) and that it is not rescued by s23 because it is a building rather than a silo. There is, however, a fundamental problem with setting up a dichotomy between a building on the one hand and an item within List C on the other – the whole point of List C is that it opens up the possibility of claiming for assets that are buildings or parts thereof. So, just as HMRC could not deny allowances for a fire sprinkler by arguing that ‘it is (part of) a building rather than a fire alarm system’, it is inappropriate to argue that ‘it is a building or structure, rather than a silo’. In other words, the question is simply whether the asset is a silo and, if it is, the fact that it may also be a building and/or a structure is no longer relevant in applying the statutory test. (We consider below the separate matter of whether it was provided for temporary storage.)

To be fair, HMRC’s use of the words ‘first and foremost’ suggests that the argument was possibly that even if it was a silo, it was also and primarily a building or structure, and that it would therefore fail the case law test of what constitutes plant and machinery, even if it squeezes through as a silo within List C. But this is not how the summarised HMRC argument came across in the case report, and is in any case still not the correct test.

After consideration of various definitions of ‘silo’, the tribunal was satisfied that this facility qualified as such. The case for the taxpayer was well constructed, with evidence from appropriate experts. Relevant considerations included that the facility cost around double the cost of a general purpose agricultural building and that it would be unsuitable for livestock and for various other agricultural purposes.

For important commercial reasons, the grain held in the silo had to be dried and then kept dry. This was achieved in part by the use of special pedestals, together with an electronic unit controlling the relative humidity and a large fan to remove moist air. Crucially, however, it was also found as a fact that “the building, roof and area above the grain are specifically designed for this extraction system to work”. In other words, the design of the silo was integral to its function.

As such, the tribunal found that the facility was not only used, but also built and designed, to dry the grain and then to keep it dry, so it had more to do than merely store the grain: it was performing a plant-like role. Reference was then made to the Barclay Curle case (HL 1969, 45 TC 221), concerning a dry dock, in which Lord Reid commented that “I do not say that every structure which fulfils the function of plant must be regarded as plant, but I think that one would have to find some good reason for excluding such a structure”.

The tribunal was satisfied that “this facility performs one particular function within the overall activities constituting the appellant’s business, namely the active function of drying the grain after it has been harvested and then of keeping it conditioned in storage until it is sold”.

The long discussion about whether the storage could be said to be ‘temporary’ is perhaps of relatively little practical interest beyond the treatment of silos themselves and can be summarised quite briefly. HMRC sought to draw a distinction between the present circumstances, where grain was held for up to 10 months, and those of an earlier silos case, Schofield v R & H Hall Ltd (1975) 49 TC 538, where the grain was stored for just seven days. However, the tribunal found that the storage was temporary on the basis that there was a period of some eight weeks each year where the silo was empty, and that storage of the grain formed only a limited part of the overall processes of the taxpayer’s business.

Broader considerations

There has long been an attitude within HMRC and its predecessor that the courts and tribunals are too lenient in relation to the definition of ‘plant’. When the legislation now at ss21–23 was first introduced, the then Inland Revenue wrote to the then Institute of Taxation, referring to an “erosion in the plant/structure boundary”. The stated purpose of the rules then introduced was therefore “to strengthen the current boundary, and to ensure that no further erosion takes place”.

In the present May case, an HMRC employee working as a capital allowances specialist left the department in 2015, and was able to advise the taxpayer. According to the case report: “Internally within HMRC he expressed the view that there was merit to the appellant’s claim, but he produced a report stating that the expenditure did not qualify because he was told that it was HMRC policy to ‘hold the line’ that such structures did not qualify.”

It is worth remembering, as HMRC repeatedly likes to point out, that the List C exemptions are specific, and do not operate by analogy. The taxpayer in this case was able to win because of the specific reference to silos in List C, but the HMRC position is clear and the case would have been lost if the asset had not been a silo. Any cases involving whole buildings or structures may be susceptible to HMRC attack.

Had the expenditure been incurred today, the costs could presumably have been claimed under the new regime for structures and buildings allowances (SBAs), though the details of the final legislation for this allowance are not available at the time of writing, and may still be some months away. In any case, on the basis of the information we do have, the SBA looks like a poor relative of plant and machinery allowances – in terms of timing of tax relief, interaction with the computation of chargeable gains, and the inability to control the disposal proceeds on sale (ie, in the absence of an equivalent to the s198 fixtures election).

First-tier Tribunal decisions are not binding, but this is the latest in a succession of recent cases in which the tribunals have broadly supported the taxpayer rather than HMRC in terms of capital allowances claims – here regarding a silo, much (not all) of the expenditure in SSE Generation Ltd v HMRC (2018) TC06618 regarding the construction costs of a huge underground electrical project, and on an important point of principle regarding former claims in Glais House Care Ltd v HMRC (2019) TC06945.

It is always worth remembering, subject nowadays to the statutory restrictions at ss 21 and 22, that the courts have repeatedly affirmed that ‘plant’ has a broad meaning. In Yarmouth v France back in 1887, the term was held to encompass “whatever apparatus is used by a businessman for carrying on his business … all goods and chattels”. Nearly a century later, in CIR v Scottish & Newcastle Breweries Ltd [1982] BTC 187, Lord Lowry noted that “much difficulty is caused by seeking to place limitative interpretations on the simple word ‘plant’” and he went on to say that the term has a “comprehensive meaning”.

About the authors

Ray Chidell is a technical director, and Jake Iles is managing director, of Six Forward Capital Allowances. Together they write Capital Allowances and the A-Z of Plant & Machinery, both available from Claritax Books