JD Wetherspoon Plc
| Jurisdiction | UK Non-devolved |
| Judgment Date | 18 December 2009 |
| Neutral Citation | [2009] UKFTT 374 (TC) |
| Date | 18 December 2009 |
| Court | First Tier Tribunal (Tax Chamber) |
[2009] UKFTT 374 (TC)
Theodore Wallace(Chairman), John Walters QC
Julian Ghosh QC and James Henderson, instructed by Deloitte LLP, for the Appellant Company
Rupert Baldry, Counsel, instructed by the General Counsel and Solicitor to HM Revenue and Customs, for the Respondents
Corporation tax - capital allowances - machinery or plant - conversion, fitting out and refurbishment of public houses - whether items of cost qualify for allowances under Capital Allowances Act 1990 section 24section 24 CAA 1990 or Capital Allowances Act 1990 section 66section 66 CAA 1990 (or both) - consideration of what amounts to alterations to an existing building incidental to the installation of machinery or plant - decision in principle on sample expenditure - appellant successful in part
The First-tier Tribunal considered what amounted to alterations to an existing building incidental to the installation of machinery or plant and made a decision in principle on sample expenditure. The taxpayer was successful in part. In respect of preliminaries, as a general rule, an overall global apportionment of preliminaries which did not relate to individual items was a legitimate approach. However, HMRC were clearly entitled to investigate the figures in any particular case to see whether a more specific breakdown was reasonable and proportionate.
The taxpayer company owned and developed public houses throughout the UK. In its corporation tax return for the year to 31 July 1999 it claimed qualifying capital allowances under CAA 1990, Capital Allowances Act 1990 section 24 section 66ss. 24 and 66 in respect of building costs, professional fees and head office costs of £33,740,007 which were reduced by Revenue and Customs to £17,562,348. The taxpayer appealed and the hearing concerned sample claims involving one per cent of the total expenditure in the appeal in respect of the conversion of two specified public houses (P and F) including 123 individual items not including preliminaries. P had been converted from an old theatre with the basement being converted into a kitchen with new walls with wipe-free tiles, together with toilets, walls, partitions and drainage. Work had been carried out on F to create toilets and drainage.
It was common ground that the expenditure in question was capital expenditure incurred wholly and exclusively for the purposes of the taxpayer's trade. The appeal dealt specifically with the expenditure claimed by the taxpayer under CAA 1990, s. 24 on decorative wood panelling, to create ambience for the purposes of its trade. Claims were made for incidental works under CAA 1990, s. 66 for alterations to P, whereby the wipe-clean kitchen walls were constructed to enable the installed cookers to be used in carrying on its trade; and also claims in relation to the toilets and the drainage in both pubs required under various regulations, including health and safety; and certain site overhead expenditure and preliminaries, including professional fees (such as structural engineers and planning supervisory fees) which were attributable to expenditure.
The special commissioners allowed in part the taxpayer's appeal against the Revenue's refusal of its claim for capital allowances ((2007) Sp C 657). The parties were unable to dispose of the outstanding matters by agreement and so the court was asked to determine the remaining issues. At the 2009 hearing the parties had agreed lists of "clear" and "unclear" items. "Clear" items were those as to which the parties were in agreement as to whether on the basis of the first decision the items did, or did not, attract allowances. The parties asked for a formal decision on the qualification (or not) for allowances of the clear items. "Unclear" items were those where the parties remained in disagreement about the application of the first decision, the taxpayer contending that the items attracted allowances and HMRC contending that they did not.
Whether the items in question, and preliminaries generally, attracted capital allowances.
The First-tier Tribunal (Theodore Wallace and John Walters QC) (allowing the appeal in part) said that the relevant alteration to a building qualifying for allowances under Capital Allowances Act 1990 section 66s. 66 was restricted to the application to the surface of the building of a splashback, i.e. tiling sufficient specifically to deal with splashing which might be expected to be caused by the usual functioning of any qualifying items of machinery or plant. Thus the tribunal did not accept that a part of the cost of a fully tiled wall or floor could qualify as the cost of an alteration to the building incidental to the installation of machinery or plant. Moreover, the cost of plastering, which was needed to receive the tiling, even where a splashback was applied, was not a cost of alteration to a building incidental to the installation of machinery or plant on that basis. That was part of the cost of finishing the walls generally.
The eligibility of the cost of cement flooring followed the decision on whether the costs of floor tiles to be laid on top of the cement flooring was eligible. The crucial issue for those items was whether the relevant costs were expenditure on alterations to an existing building incidental to the installation of machinery or plant for the purposes of the trade, or expenditure on alterations which were not incidental to the installation of machinery or plant because the alterations, being the provision of floors, could not be regarded as incidental to the installation of machinery or plant which was to be set on them. In the tribunal's judgment the alteration was not incidental to the installation of any machinery or plant.
Although it was a fine distinction, the evidence indicated that the floor surfaces were needed for the operation of the equipment, not for the installation of the equipment in a state in which they could be used for the purposes of the trade. The floors and their provision did not have a sufficient nexus with the installation of any equipment to enable the cost of them to be eligible for allowances under s. 66. That conclusion applied to the costs of the provision of the surface of the non-slip and wipe-clean floors and a fortiori to the costs of the provision of sub-surface preparation.
The dividing line between alterations which were incidental to the installation of machinery or plant and those which were not should be drawn in this area between splashbacks specifically provided for splash-producing equipment and other wipe-clean and/or non-slip surfaces which formed parts of walls or floors and, as such, could not be said to have been alterations to an existing building incidental to the installation of machinery or plant for the purposes of the trade.
Works carried out to produce an inclined floor in the new cold store were all incidental to the installation of a new drainage channel, which required an inclined floor in order for it to function at all. There never was any intention to provide a level floor which was then altered to an inclined floor. It was to be an inclined floor from the start. All the expenditure involved was therefore expenditure on alterations incidental to the installation of machinery or plant. That was not a disproportionate conclusion. The fact that the cost of altering the existing building to provide the inclined floor was relatively higher than the cost of the machinery or plant to whose installation the alteration was incidental was on the facts immaterial. The proportion of total expenditure which related to the cold store area was eligible for allowances on the same basis as the costs of providing the inclined floor.
As regards lighting, both the physical type of the light and the usage of the light were relevant factors, and where lighting was specially constructed or designed to serve some trade-specific function and was used for that function it was likely to qualify as plant. Further, ordinary light fittings might qualify as plant if they provided more than general illumination, so that they also might be said to fulfil some trade-specific function, such as providing ambience. HMRC had accepted that the "front of house" lighting, in the bars and so forth, qualified as plant. However the tribunal could not make any finding on whether or not the kitchen lighting was "trade-specific". In those circumstances, it was open to it, as a matter of case management, to give the taxpayer the benefit of the doubt and say that it was eligible for allowances under s. 66 since it would not be possible to reach a decision on the present state of the evidence as to whether or not the kitchen lighting was "trade specific", and it would be disproportionately inconvenient and not in the interests of justice to direct a further adjournment to deal with the point.
An overall global apportionment of preliminaries which did not relate to individual items which accorded with commercial practice would normally be appropriate and was a legitimate approach in the present circumstances. However HMRC were clearly entitled to investigate the figures in any case to see whether a more specific breakdown was reasonable and proportionate.
1. After the first hearing of this appeal in June 2007, this Tribunal, sitting as the Special Commissioners, on 21 December 2007 released a decision in principle on the main issues raised ("Our First Decision") and adjourned the appeal for the parties to consider whether in the light of Our First Decision, they could dispose of the outstanding matters by agreement.
2. This did not prove possible and in June and July 2009, this time sitting as the First-tier Tribunal (Tax Chamber), we heard further argument to enable us to issue a decision on issues on which the parties were unable to agree the application of Our First Decision (this decision). The issues related to the two public houses which...
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J D Wetherspoon Plc v Revenue and Customs Commissioners
...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 The decisions reso......