Altrad Services Ltd and Another v R & C Commissioners
| Jurisdiction | UK Non-devolved |
| Judgment Date | 12 July 2022 |
| Neutral Citation | [2022] UKUT 185 (TCC) |
| Year | 2022 |
| Court | Upper Tribunal (Tax and Chancery Chamber) |
[2022] UKUT 185 (TCC)
Mrs Justice Falk, Judge Jonathan Richards
Upper Tribunal (Tax and Chancery Chamber)
Corporation tax – Capital allowances – Purposive construction of CAA 2001, s. 61 – Were the appellants entitled to additional writing down capital allowances? – Yes – Appeal allowed.
In Altrad Services Ltd & Anor v R & C Commrs [2022] BTC 520, the Upper Tribunal (UT) overturned the decision of the First-tier Tribunal (FTT) in Cape Industrial Services Ltd & Anor [2020] TC 07648, finding that the FTT had erred in law in accepting HMRC’s Ramsay argument that arrangements entered into by the taxpayer companies did not have the intended consequences for capital allowances purposes.
This was an appeal by Cape Industrial Services Ltd (since renamed Altrad Services Ltd) and Robert Wiseman and Sons Ltd (the appellants) against the decision of the FTT to deny their appeals against closure notices issued by HMRC which reduced the appellants’ entitlement to capital allowances.
The appellants had entered into arrangements with a leasing company (SGLJ) intended to increase the amount of expenditure qualifying for capital allowances for plant and machinery. Briefly, under the arrangements, the appellants sold assets to SGLJ; the appellants leased the assets from SGLJ; and, on the expiry of the lease, SGLJ exercised a put option which required the appellants to buy the assets at the agreed option price.
It fell to the UT to determine whether the FTT had erred in law in concluding that:
- applying the purposive approach set out in the WT Ramsay Ltd v IR Commrs (1982) 54 TC 101 line of cases, the appellants did not cease to own the assets for the purposes of CAA 2001, s. 61 when they sold the assets to SGLJ (issue 1);
- the sale of the assets, coupled with the put option, caused s. 67 to apply with the result that the lease was not a long funding lease (issue 2); and
- the option price fell within the definition of QA in s. 70E (issue 4).
A further strand of argument – issue 3 – had been abandoned by the time of the hearing.
The UT upheld the decision of the FTT with regard to issues 2 and 4.
For the UT, issue 1 could only be resolved by: first, considering the meaning and purpose of s. 61(1)(a); and second, ascertaining the relevant facts in order to determine whether the sale of the assets fell within s. 61(1)(a) as purposively construed.
The phrase “ceases to own” for the purposes of s. 61(1)(a) was: (1) to be applied by reference to a snapshot in time, not over a period of time; (2) did not expressly invite any analysis of why the person ceased to own the asset; and did not invite any analysis of whether it was possible that the person would become the owner of the asset again in the future.
The FTT’s factual findings as to the composite nature of the transactions, and the appellants’ purpose in entering into those transactions were not relevant facts in this regard.
The UT decided issue 1 in the appellants’ favour: the FTT erred in law in accepting HMRC’s Ramsay argument. The decision of the FTT was set aside and remade with the result that the appellants’ appeals against HMRC’s closure notices were allowed.
As the statutory anomalies at the heart of this case were corrected by Finance Act 2011, only the failed Ramsay argument is of ongoing interest.
The UT acknowledged that some readers of the decision may be surprised that an artificial series of transactions, found to be devoid of business purpose by the FTT, should survive a Ramsay challenge, and hinted that the fault could lie with the way in which HMRC’s case was made: “it is not for us to comment on other ways in which the Ramsay argument could have been advanced, or the conclusions we might have reached if different arguments had been put forward”.
Comment by Stephen Relf, Deputy Content Manager – Tax at Croner-i.
Jonathan Peacock QC and Edward Hellier, Counsel, instructed by KPMG for the appellants
David Milne QC and Barbara Belgrano, Counsel, instructed by the General Counsel and Solicitor for Her Majesty's Revenue and Customs for the respondents
[1] These are appeals against a decision of the First-tier Tribunal (Tax Chamber) (the “FTT”) released on 23 March 2020 (the “Decision”). The first appellant was previously named “Cape Industrial Services Limited” and referred to in the Decision as “CIS”, an abbreviation that we will also use. We refer to the second appellant as “Wiseman”.
[2] By the Decision, the FTT dismissed the appellants' appeals against closure notices that HMRC had issued reducing their entitlement to capital allowances. The closure notice for CIS related to its accounting period ended 31 December 2010 and, by denying capital allowances, made CIS liable to additional corporation tax of £2,977,863. The closure notice for Wiseman related to its accounting period ended 31 March 2011 and resulted in an additional corporation tax liability of £12,623,202.82.
[3] The appellants appeal with the permission of the Upper Tribunal and, by their Responses to the appeals, HMRC seek to rely on arguments which were unsuccessful before the FTT.
[4] These appeals relate to the detailed operation of the capital allowances regime set out in the Capital Allowances Act 2001 (“CAA 2001”). Relevant statutory provisions are set out in the Appendix to this decision, but to put the issues in context we start with a high-level overview of the regime so far as relevant to these appeals.
[5] The depreciation in value of plant and machinery and other capital items does not give rise to a deductible expense for tax purposes. CAA 2001 seeks to reduce the impact of this rule by providing for capital allowances to be given, by way of a deduction against taxable profits, in respect of expenditure on, among other things, plant and machinery used for the purposes of a “qualifying activity”, which includes a trade. Allowances are generally given on a “pooled” basis, so a taxpayer incurring expenditure to acquire plant and machinery increases the pool of expenditure qualifying for allowances. Allowances are made as a percentage of the balance available in the pool, the pool being reduced by the amount of the allowances given (known as the reducing balance basis). A taxpayer selling plant and machinery that has qualified for allowances in any accounting period is required to bring the sale proceeds into account as a “disposal value”. Amounts brought into account as disposal value reduce the expenditure in the pool eligible for allowances in subsequent accounting periods or, if the disposal value exceeds the balance in the pool, create a balancing charge.
[6] The general rule, set out in s11 of CAA 2001, is that expenditure on plant and machinery qualifies for capital allowances if: (i) the expenditure is “capital expenditure on the provision of plant and machinery”, (ii) it is incurred for the purposes of a qualifying activity, and (iii) the person incurring the expenditure owns the plant and machinery as a result of incurring it. Section 61 deals with “disposal events”, with the paradigm example of such an event occurring when a person “ceases to own” plant and machinery (s61(1)(a)). As Mr Peacock QC put it in his oral submissions, s11 and s61 are “book-ends” with s11 providing for capital allowances to begin to accrue when plant and machinery is purchased and s61 providing for future allowances to cease to accrue when that plant and machinery is disposed of (to the extent that disposal value is brought into account), as well as recapturing excessive allowances that have been given.
[7] Until 2006, “ownership” of plant and machinery was central to the entitlement to capital allowances. A taxpayer who incurred expenditure on plant and machinery would not (generally) be entitled to allowances unless the taxpayer owned the plant and machinery in question (see s11 of CAA 2001). Similarly, if the plant and machinery ceased to be owned, a disposal value would be brought into account in the pool, reducing the taxpayer's future entitlement to allowances.
[8] One exception to the code's focus on “ownership” was made for hire-purchase and similar contracts. Under such a contract, a taxpayer might be given the use of an item of plant and machinery in return for a stream of recurring payments, but only obtain “ownership” of the item, either automatically or by exercising an option, once all instalments have been paid. Legislation, now found in s67 of CAA 2001, deems a taxpayer in this position to be the owner of the plant and machinery from inception of the hire-purchase contract, even though ownership would not be obtained until the end. In a similar vein to the position where the asset is owned by the taxpayer, s67(4) of CAA 2001 provides for a deemed cessation of ownership if a person ceases to be entitled to the benefit of a hire-purchase contract, so that a disposal value can be brought in under s61.
[9] Until 2006, the general position was that a person leasing plant and machinery could not obtain capital allowances. Any allowances would benefit the person who owned the plant and machinery, namely the lessor. However, accounting practice had long recognised that certain leases of plant and machinery (“finance leases”), while taking the legal form of a lease of plant and machinery, were in substance loans in which the lessee had the risks and rewards of ownership of the machinery and raised finance from the lessor, with the machinery serving as the collateral or security for that loan. Consistent with that view of a finance lease, the lessee, and not the lessor, would recognise the machinery as an asset on its balance sheet.
[10] In 2006, amendments were made to CAA 2001 which recognised that a lessee of plant and machinery under a “long funding finance lease” (and certain operating leases that...
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