J D Wetherspoon Plc v Revenue and Customs Commissioners
| Jurisdiction | UK Non-devolved |
| Judgment Date | 31 January 2012 |
| Neutral Citation | [2012] UKUT 42 (TCC) |
| Date | 31 January 2012 |
| Court | Upper Tribunal (Tax and Chancery Chamber) |
[2012] UKUT 42 (TCC).
Upper Tribunal (Tax and Chancery Chamber).
Briggs J, Judge Howard M Nowlan.
Julian Ghosh QC, James Henderson and Jonathan Bremner (instructed by Deloitte LLP) for the appellant.
Timothy Brennan QC and Rupert Baldry QC (instructed by the Solicitor to HM Revenue and Customs) for the respondents.
The following cases were referred to in the judgment:
IR Commrs v Barclay, Curle & Co LtdTAX (1969) 45 TC 221
IR Commrs v Scottish & Newcastle BreweriesTAXTAX [1982] BTC 187; 55 TC 252
St John's School v WardTAX (1974) 49 TC 524
Wimpy International Ltd v WarlandTAXTAXTAX [1989] BTC 58; 61 TC 51 (CA); [1987] BTC 591
Yarmouth v FranceELR (1887) 19 QBD 647
Corporation tax - Capital allowances - Machinery or plant - Conversion, fitting out and refurbishment of public houses - Whether items of cost qualified for allowances as machinery or plant or incidental expenditure - Alterations to existing building incidental to installation of machinery or plant - Apportionment of preliminaries - Decision in principle on sample expenditure - Capital Allowances Act 1990, Capital Allowances Act 1990 section 24 section 66ss. 24, 66.
These were an appeal by the taxpayer and a cross-appeal by HM Revenue and Customs against decisions of the special commissioners ((2007) Sp C 657) and of the First-tier Tribunal ([2009] UKFTT 374 (TC); [2010] TC 00312) on the taxpayer's claim for capital allowances for expenditure on the fitting out and refurbishment of public houses.
The decisions resolved appeals by the taxpayer against the disallowance by HMRC of claims for capital allowances for expenditure on the fitting out and refurbishing of public houses which had originally been made in its revised corporation tax return for the accounting year to 31 July 1999, and disallowed in a closure notice dated 14 May 2003. The effect of the closure notice was to adjust downwards the expenditure in that year on qualifying allowances in respect of building costs, professional fees and head office costs from 33.7m to 17.5m. The disputed claims related to a large number of public houses, but the appeal was argued by reference to a specimen pub. That pub was previously a theatre and was a listed building. Its conversion took some 18 months, and included the provision of a new toilet area, and an entire new floor including a new bar and a new kitchen area. It was one of some 288 fit-out projects undertaken during the tax year in question. The process involved not merely refurbishment but the creation within the building of entire new rooms, requiring the erection of new walls, floors and ceilings as well as the replacement at basement level of floors by new, stronger floors. Both in the main public areas and, in particular, in the ladies' toilet area, the taxpayer went to considerable lengths to provide an appealing ambience for the purposes of attracting customers.
The taxpayer appealed on the ground that the decisions wrongly categorised four decorative items included within the fit-out of the public parts of the pub as failing to qualify as plant under the Capital Allowances Act 1990, s. 24 because they had become part of the premises. The items in question consisted of panelling, cornices and architraves and metal end-pieces to balustrades.
The taxpayer also complained that the decisions adopted an incorrectly narrow construction of the phrase, in s. 66, "capital expenditure on alterations to an existing building incidental to the installation of machinery and plant for the purposes of the trade", and thereby excluded expenditure on substantial parts of the kitchen and toilet areas constructed and fitted out at the pub. HMRC supported the construction of s. 66 applied in the decisions, but complained that, in respect of certain items in the kitchen and toilet areas, that construction had not then been applied.
HMRC cross-appealed on the ground that the FTT was wrong to permit expenditure on certain preliminary items to be apportioned by reference to the ratio between qualifying and non-qualifying (for capital allowances) works within the project for refurbishment of the pub as a whole, on the ground that since those items were "trade-specific" it was incumbent on the taxpayer to prove the precise amount expended upon qualifying works.
Held, dismissing the taxpayer's appeal and allowing HMRC's cross-appeal in part:
1.The tribunal identified the critical question as whether the decorative panelling was more appropriately described as part of the premises in which the pub's trade was carried on or instead as an embellishment used to enhance the atmosphere of those premises. The tribunal's conclusion was that, balancing all the considerations, the panelling was more appropriately to be described as having become part of the premises than as having retained a separate identity. Accordingly it concluded that it did not qualify as plant. The tribunal applied the correct test. While the manner in which an item had been fastened to premises was plainly relevant, questions of physical fastening were not conclusive. The taxpayer's submission that the question whether any particular item had become part of the premises had to be answered functionally, by asking whether the function of the item was to provide shelter or housing, or alternatively to provide an attraction to customers for the purposes of the trade, was rejected. While all the tests for the identification of plant were, in a sense, functional, the functional aspect of the premises test was to be addressed to the premises as a whole, rather than to the item in dispute. Therefore the appeal in relation to the panelling failed. In relation to the cornice work, architraves and balustrade ends it was fanciful to suppose that any of them could be regarded as having retained their identities, separate from the ceilings, walls and balustrades of which they formed part. Since those ceilings, walls and balustrades were all clearly part of the premises, so were the cornices, architraves and balustrade end-fittings. (IR Commrs v Scottish & Newcastle Breweries [1982] BTC 187; 55 TC 252 considered; Wimpy International Ltd v Warland [1989] BTC 58; 61 TC 51 applied.)
2.Section 66 did not in terms provide a new or separate category of allowable expenditure. Rather, it was a deeming provision which required expenditure on certain alterations to existing buildings to be treated as expenditure on the provision of plant or machinery even if, apart from the section, it would not have been so treated. The touchstone for that deeming provision was that the expenditure on alterations be "incidental to the installation of the machinery or plant". Viewed purposively, the focus of the section was on the point that if plant was installed in an existing building rather than in a purpose-built new building, it was entirely possible that something would not fit, and that that would lead to alterations having to be made to the existing building. In the case of a purpose-built new building, there would generally be no equivalent need for such expenditure. Thus s. 66 levelled the playing field between new and existing buildings by affording taxpayers relief for expenditure on existing buildings which would not be needed in relation to the installation of the same plant in new buildings, or in the open. The taxpayer's case, that s. 66 applied to any alterations designed to facilitate the better use of installed plant, would often have exactly the opposite result. The question, in relation to each disputed alteration, was whether the expenditure was truly incidental to the installation of plant. The scope of s. 66 was intended to be fairly limited, and it did not apply when expenditure could not realistically be said to be incidental to the installation of plant in any sense. (IR Commrs v Barclay Curle & Co Ltd (1969) 45 TC 221 considered.)
3.The installation of sanitary ware for toilets or of cookers for kitchens did not mean that the entire building work on the toilets and kitchens could properly be described as alterations incidental to the installation of plant. A relevant disputed item of expenditure on building alterations was the claim for the expenditure on strengthening the kitchen floor in order to support the weight of commercial cooking equipment in the kitchen. That could qualify for allowances under s. 66. It did not conflict with the general proposition that s. 66 would usually confer allowances for alterations to existing buildings, where similar expenditure would not have to be incurred with a purpose-built new building. If a basin was installed in an existing building, and a small area of splash-back tiling was provided around the basin, then that splash-back tiling could be said to be an alteration to the existing building, incidental to the installation on the basis that it was designed to enable the basin to be used without damaging the adjacent brickwork, and for no other purpose. By contrast, if a whole room or a kitchen was being tiled for numerous purposes, then even the area around a sink or basin was being tiled because the whole kitchen or work-areas in the kitchen were being tiled. There was therefore a distinction between the specific splash-back tiling, created simply because of the installation of the sink, and the continuation of the entire tiling around the work areas of the kitchen for numerous reasons. Neither such general tiling, nor any fractional element of it, would qualify under s. 66.
4.The claim that the whole kitchen tiling and installation of doors to isolate the kitchen were incidental to the installation of cookers was rejected. Strengthening of the kitchen floor was properly allowable under s. 66. No allowances should have been granted for any expenditure in relation to the construction of toilet blocks in the previous void area of the basement. Allowances should have been given under s. 24 for the...
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