Cheshire Cavity Storage 1 Ltd v The Commissioners for HM Revenue and Customs
| Jurisdiction | England & Wales |
| Judge | Lord Justice Lewison,Lord Justice Baker,Lady Justice Whipple |
| Judgment Date | 10 March 2022 |
| Neutral Citation | [2022] EWCA Civ 305 |
| Year | 2022 |
| Court | Court of Appeal (Civil Division) |
| Docket Number | Case No: CA-2021-000609 (formerly A3/2021/0949) |
[2022] EWCA Civ 305
Lord Justice Lewison
Lord Justice Baker
and
Lady Justice Whipple
Case No: CA-2021-000609 (formerly A3/2021/0949)
IN THE COURT OF APPEAL (CIVIL DIVISION)
ON APPEAL FROM THE UPPER TRIBUNAL
TAX AND CHANCERY CHAMBER
UT/2019/0156
Judge Timothy Herrington
Judge Swami Raghavan
Royal Courts of Justice
Strand, London, WC2A 2LL
Jonathan Peacock QC & Sarah Black (instructed by Enyo Law LLP) for the Appellants
Aparna Nathan QC (instructed by HMRC Solicitors Office) for the Respondent
Hearing date: 1 March 2022
Approved Judgment
This judgment was handed down remotely by circulation to the parties' representatives by email and released to BAILII. The date and time for hand-down is deemed to be 10am on Thursday 10 March 2022.
Introduction
The issue on this appeal is whether the taxpayers are entitled to capital allowances in respect of the expenditure incurred on the introduction of water into salt bearing rock so as to dissolve the rock and create an impervious cavity, typically in the shape of a teardrop (“leaching”), and the displacement of the resulting brine by the introduction of gas (“de-brining”) so as to permit the storage of gas in the cavity.
The Upper Tribunal (Judge Herrington and Judge Raghavan) upholding the decision of the FTT held that they were not. The decision of the UT is at [2021] UKUT 50 (TCC), [2021] STC 675. The decision of the FTT (Judge Mosedale) is at [2019] UKFTT 0498 (TC).
In order to qualify for capital allowances, the expenditure must be expenditure on the provision of plant. It is clear from the authorities that a decision whether something is or is not plant is a question of fact, or a question of fact and degree. In some cases it is possible to take either view, and in such a case the decision of the fact-finding tribunal cannot be impugned. Since the question whether something is or is not plant is a question of fact, or a question of fact and degree, it is necessary to pay close attention to the facts of previous cases. In some cases the court has upheld the decision of the fact finding tribunal on the basis that it was entitled to find as it did. In such a case, it does not follow that the fact-finding tribunal would have made an error of law if it had decided the question differently.
Having heard argument from both sides on the question whether the cavities were “plant” in the sense in which that word has been interpreted in the case-law, we informed the parties that we would dismiss the appeal, with written reasons to follow. These are my reasons for joining in that decision.
The facts
I can take the relevant facts more or less verbatim from the UT's decision supplemented, where necessary, by additional findings made by the FTT.
The taxpayers' business is the development, construction, and operation of gas storage facilities in the UK. They operate gas storage facilities on adjoining sites in Cheshire. They are indirectly owned by EDF Energy PLC whose corporate group supplies gas to customers over the National Transmission System (“NTS”) owned by National Grid. The corporate group stores gas as part of its business.
The cavities in issue in this appeal hold gas at high pressure. A single cavity can hold the same as about 300 gasometers (large cylindrical containers, now disused but a familiar feature in many towns) and are considered safer as they hold the gas underground. Gas cavities involve fewer contaminants than other storage methods allowing quick removal (“fast cycle”) of gas. In order to use the cavities, the taxpayers incurred expenditure on boreholes, pipework, pumping and dehydration equipment, and on control mechanisms.
One of the natural features of the geology of this part of Cheshire is underground salt rock (or “halite”), which is suitable for mining for the purpose of extracting salt. The cavities are created by a process called “leaching”. This involves drilling a borehole into naturally occurring salt rock underground. The water dissolves the rock, leaving saltwater (brine) eventually creating a tear shaped cavity underground full of brine. The borehole is designed to permit the extraction of the brine; and if the purpose of the operation is to obtain salt, then the salt can be extracted from the brine with a surface level operation. Some of the cavities were created in this way, as a result of salt mining. The cavity is converted to gas storage by exchanging the brine with gas via borehole pipes (“de-brining”). The capital expenditure in issue arises in relation to leaching and de-brining the cavities.
The brine cannot simply be removed from the cavity because that would risk collapse. So, over a period of about three months, a suitable salt cavity is converted to gas storage by the slow exchange of the brine with gas via pipes through the borehole. At the end of the process, marl (insolubles originally present in the halite) and a small amount of brine will remain at the bottom of the cavity; otherwise the cavity will hold gas. Once filled with gas, sufficient gas to fill the cavity at a certain minimum pressure must always be left in the chamber to avoid the risk of partial or total collapse of the cavity. The difference between the amount of gas which may be stored at the highest safe pressure, and the minimum amount of gas which must be stored to maintain integrity (“the cushion gas”) was known as “working gas”. It was the gas that could be stored in, and removed from, the cavity. In practice cushion and working gas were all the same gas stored in the cavity. Referring to gas as “cushion gas” was simply a shorthand method of referring to the minimum amount of gas that had to be left in the cavity for reasons of structural safety. The “cushion gas” cannot be sold into the NTS as it must remain in the cavity.
The halite in which each cavity was created naturally forms an impervious barrier to the gas. Therefore, the gas pumped in does not leak out of the cavity into the surrounding rock. So the cavities did not need to be, and were not, artificially lined in any way. The sides to the cavities were naturally occurring rock. The deeper the cavity, the higher the pressure at which the gas can be stored. The gas cavities were connected to the NTS. It was possible for gas to “free flow” (i.e. movement simply by virtue of a differential from high pressure to low pressure) in and out of the cavity, though whether this could happen was out of the taxpayers' control because it depended (in part) on the pressure in the NTS. Otherwise, gas would need to be moved by compressors. The cavity, by itself, was not a pump or compressor, and did not, by itself, act as a pump or compressor.
The taxpayers' business was gas storage, not distribution or processing of gas. The facilities were used for fast cycling storage of gas. EDF did not own the gas but was paid by other gas owner customer(s) for moving and storing the gas so those customers could profit from gas price volatility. CCSI did own the gas and intended to profit from such volatility on their own account.
The function of the cavities was to store gas taken from the NTS safely (so that it did not dissipate) and in a condition that would allow it to be returned to the NTS (or at least in a state from which the taxpayers' processing plant would be able to restore it to a condition suitable to be returned to the NTS).
The FTT considered the question whether the cavities had a “plant-like function” in some detail. What Judge Mosedale said at [127] was this:
“I am prepared to accept that the cavities did have a plant like function similar to that of a pump/compressor in that the manner of construction (a large hole in the ground connected by pipes to the NTS) meant that when the pressures were right and the valves open, gas would free flow to or from the cavity. However, I accept the evidence that that was an incident of the construction and not the reason they were constructed in that manner. The main reason gas was stored in salt cavities, as I understood it, was that that gas cavities were a safe method of storing very large amounts of gas in a way that would enable it to be fast-cycled, and thus opened up the possibility of arbitrage on gas prices. I had no evidence that their plant-like ability to act like a pump/compressor was essential: on the contrary, the evidence which I had was that the appellants had little control over when they would be able to free flow gas and they had compressors to move the gas when it was not possible. From the evidence I had I was unable to conclude how often free flow took place and the appellants have therefore failed to show that it was common let alone a main function of the cavities.” (Emphasis added)
But she went on to say that the purpose of the cavities was to store gas; and not to “free flow” it. She then considered the temperature of the gas. She said of that point:
“While the evidence was that the cavity itself might influence the temperature of the gas, it was not the main influence and, in any event, altering the temperature of the gas was clearly not a function of the cavity.”
In fact basic physics tells us that if you increase the pressure of gas in an enclosed container its temperature rises. The next argument was that the function of the cavities was not merely to store gas but to store gas at high pressure, and the cavities should be compared to a cold room which allowed storage at low temperature. She rejected that argument at [133]. She said:
“But I consider that the purpose of the high pressure was simply to store more gas. So, the ability of the cavities to store gas at high pressure was a premises like...
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