London Luton Hotel Bpra Property Fund LLP v The Commissioners for HM Revenue and Customs
| Jurisdiction | England & Wales |
| Judge | Lady Justice Whipple,Lady Justice Falk,Lord Justice Lewison |
| Judgment Date | 04 April 2023 |
| Neutral Citation | [2023] EWCA Civ 362 |
| Docket Number | Case No: CA-2021-000087 |
| Court | Court of Appeal (Civil Division) |
| Year | 2023 |
[2023] EWCA Civ 362
Lord Justice Lewison
Lady Justice Whipple
and
Lady Justice Falk
Case No: CA-2021-000087
CA-2021-000738
IN THE COURT OF APPEAL (CIVIL DIVISION)
ON APPEAL FROM THE UPPER TRIBUNAL (TAX AND CHANCERY CHAMBER)
MR JUSTICE MICHAEL GREEN AND UPPER TRIBUNAL JUDGE THOMAS SCOTT
Royal Courts of Justice
Strand, London, WC2A 2LL
Malcom Gammie KC and Jonathan Bremner KC (instructed by DWF Law LLP) for London Luton Hotel BPRA Property Fund LLP
Jonathan Davey KC, John Brinsmead-Stockham KC, Nicholas Macklam and Sam Chandler (instructed by the Solicitor and General Counsel to the Commissioners for HMRC) for HMRC
Hearing dates: 13 to 15 March 2023
Approved Judgment
Lady Justice Whipple and
Introduction
This is our decision on appeals by London Luton Hotel BPRA Property Fund LLP (the “LLP”) and by HMRC against a decision of the Upper Tribunal (“UT”), Michael Green J and Judge Thomas Scott, reported at [2021] UKUT 147 (TCC) (the “UT decision”). The UT decision partly reversed a decision of the First-tier Tribunal (“FTT”) reported at [2019] UKFTT 212 (TC) (the “FTT decision”).
The appeals relate to a claim by the LLP for a form of capital allowance known as business premises renovation allowance (“BPRA”) in its tax return for the year ended 5 April 2011. The claim was made in respect of the conversion of a former flight training centre located near London Luton Airport and owned by the LLP (the “Property”) into a Ramada Encore hotel. The amount claimed was £12,478,201. The LLP appealed to the FTT against HMRC's decision that £5,255,761 of the LLP's claim should be disallowed, with the result that its claim for BPRA was reduced to £7,222,439.
Although LLPs are separate legal entities from their members they can effectively be treated as transparent for certain tax purposes. The LLP's members included individual investors who sought to benefit from the LLP's claim to BPRA by setting their shares of it against their total income for tax purposes for the year ended 5 April 2011 (“sideways” loss relief). We are concerned solely with the LLP's claim for that tax year.
The LLP's primary case was and remains that it is entitled to BPRA in the full amount claimed. It maintains that the whole of that amount reflects expenditure that the LLP incurred under an agreement (the “Development Agreement”) that the LLP entered into with a developer, OVL (Bankfield) LLP (“the Developer” or “OVL”), for the conversion of the Property.
HMRC contend that it is necessary to look beyond the terms of the Development Agreement and break down the total sum into constituent elements. Both the FTT and UT agreed with that contention, with the result that each Tribunal considered the LLP's secondary case that each of those elements amounted to qualifying expenditure in any event. Different conclusions were reached on a number of the elements and both parties now appeal to this Court, with the permission of the UT.
HMRC maintain that the outcome of this case will be relevant to other claims for BPRA totalling in excess of £100m of expenditure.
The structure of this judgment is as follows:
a) Relevant legislation (paragraphs [8]–[13]);
b) The facts in outline (paragraphs [14]–[15]);
c) The issues in dispute (paragraphs [16]–[23]);
d) Additional relevant findings of facts (paragraphs [24]–[44]);
e) Approach to statutory interpretation, generally and in relation to the statutory test in issue (paragraphs [45]–[80]);
f) The individual issues (paragraphs [82]–[174]);
g) Conclusion (paragraph [175]).
Relevant legislation
The BPRA legislation is contained in Part 3A of the Capital Allowances Act 2001 (“ CAA 2001”). Unless otherwise indicated, statutory references are to provisions of the CAA 2001 as in force for the year ended 5 April 2011.
The BPRA was introduced by the Finance Act 2005 as a time-limited relief intended to incentivise the bringing back into use of unused business property in certain areas that were designated as disadvantaged. In outline, a 100% initial allowance was available if a person incurred “qualifying expenditure” in respect of a “qualifying building” in which the person incurring the expenditure had an interest (ss.360A and 360G).
“Qualifying expenditure” is defined by s.360B as follows:
“ 360B Meaning of “qualifying expenditure”
(1) In this Part “qualifying expenditure” means capital expenditure incurred before the expiry date on, or in connection with—
(a) the conversion of a qualifying building into qualifying business premises,
(b) the renovation of a qualifying building if it is or will be qualifying business premises, or
(c) repairs to a qualifying building or, where the qualifying building is part of a building, to the building of which the qualifying building forms part, to the extent that the repairs are incidental to expenditure within paragraph (a) or (b).
(2) In subsection (1) “the expiry date” means—
(a) the fifth anniversary of the day appointed under section 92 of FA 2005, or
(b) such later date as the Treasury may prescribe by regulations.
(3) Expenditure is not qualifying expenditure if it is incurred on or in connection with—
(a) the acquisition of land or rights in or over land,
(b) the extension of a qualifying building (except to the extent required for the purpose of providing a means of getting to or from qualifying business premises),
(c) the development of land adjoining or adjacent to a qualifying building, or
(d) the provision of plant and machinery, other than plant or machinery which is or becomes a fixture as defined by section 173(1).
(4) For the purposes of this section, expenditure incurred on repairs to a building is to be treated as capital expenditure if it is not expenditure that would be allowed to be deducted in calculating the profits of a property business, or of a trade, profession or vocation, for tax purposes.
…”
The terms “qualifying building” and “qualifying business premises” are defined by ss.360C and 360D respectively. In summary, a qualifying building is a building or structure (or part thereof) which is situated in an area which had been designated as a disadvantaged area, had been unused for at least one year and prior to that had last been used for the purposes of a trade, profession or vocation, or otherwise as offices. Section 360D defines “qualifying business premises” as follows:
“360D Meaning of “qualifying business premises”
(1) In this Part “qualifying business premises” means any premises in respect of which the following requirements are met—
(a) the premises must be a qualifying building,
(b) the premises must be used, or available and suitable for letting for use,–
(i) for the purposes of a trade, profession or vocation, or
(ii) as an office or offices (whether or not for the purposes of a trade, profession or vocation),
(c) the premises must not be used, or available for use as, or as part of, a dwelling.
(2) In this section “premises” means any building or structure or part of a building or structure.
…”
Allowances granted were subject to adjustment if a “balancing event” occurred. This included a sale of the property or the building ceasing to be qualifying business premises. However, at the relevant time no adjustment was made if the event in question occurred more than seven years after the building came back into use or became available for use (ss.360M and 360N).
There is no dispute that the Property was and is a qualifying building, that it became qualifying business premises as a result of its conversion from being a flight training centre to a hotel, and that the LLP “incurred” the disputed expenditure prior to the expiry date. The dispute is over whether the expenditure incurred by the LLP amounted to capital expenditure on or in connection with that conversion, within s.360B(1)(a).
The facts in outline
The facts were summarised by the UT as follows:
“14. … The BPRA legislation provides 100% capital allowances for capital expenditure incurred on or in connection with specified activities which bring certain business premises in designated areas called Enterprise Areas back into productive use. In 2009, the Developer identified a building known as Blush House (the “Property”) near London Luton Airport as having the potential to be renovated and to qualify for BPRA. Blush House was a vacant business property which had formerly been used as a flight training centre.
15. By 2011 the Developer had developed a proposal to raise the necessary finance to convert Blush House into a fully functioning 124-bedroom Ramada Encore hotel. The Developer would manage and oversee the conversion and development, and the converted property would be owned by investors, who, it was hoped and intended, would be eligible for BPRA on the qualifying element of their investments. The Developer engaged the services of Downing LLP (“Downing”) as sponsors of the fund (the “Fund”) which it had worked with on five previous development projects designed to attract BPRA. The LLP was established in order to enable investors to invest in the conversion project. The project was to be financed through a combination of debt and equity.
16. Downing issued an Information Memorandum in relation to the proposals, which was provided to potential investors and to IFAs. On 25 March 2011 individual investors subscribed in aggregate £7.2 million for interests in the LLP. Under a Facility Agreement between the Co-Operative Bank (the “Co-op”) and the LLP dated 25 March 2011 (the “Co-op Loan Agreement”) the LLP drew down a loan of £7 million (the “Co-op Loan”). The Developer also lent the LLP £1,985,000 under a Developer Loan Agreement entered...
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