SSE Generation Ltd
| Jurisdiction | UK Non-devolved |
| Judgment Date | 31 July 2018 |
| Neutral Citation | [2018] UKFTT 416 (TC) |
| Date | 31 July 2018 |
| Court | First Tier Tribunal (Tax Chamber) |
[2018] UKFTT 0416 (TC)
Judge Kevin Poole
Corporation tax – Capital allowances – CAA 2001, s. 11 and s. 21–23 – Plant and machinery allowances on expenditure incurred in construction and rectification works on underground hydroelectric power scheme – Water intakes, network of aqueducts leading to reservoir, underground headrace and tailrace, caverns housing the generating equipment and various other tunnels and conduits considered – Appeal allowed in part.
The First-tier Tribunal considered whether a range of items within a hydroelectric scheme qualified for plant and machinery allowances and allowed the appeal in part.
This appeal relates to the treatment, for capital allowance purposes, of various parts of the Glendoe hydroelectric power generation scheme near Loch Ness in Scotland.
The decision concerned the treatment in principle of various disputed items for capital allowance purposes. The quantum of claims was left to the parties.
The total cost of building the hydroelectric scheme (including rectification works following a subterranean rockfall) was around £300m. Capital allowances were claimed by the appellant on some £260m of that expenditure, of which HMRC had accepted some £34m. Approximately £227m remained in dispute and was the subject of the appeal.
From top to bottom, the scheme comprised:
- water intakes to collect water from two discrete catchment areas;
- conduits to channel the water into a main reservoir and dam;
- reservoir and dam (no claim for capital allowances made);
- main intake beside the dam where water flows into the headrace (capital allowances not disputed);
- the headrace that carries water under increasing pressure as it moves downwards to the generating equipment;
- the power cavern which is a man made cavern excavated from solid rock housing the turbine and generation equipment;
- the transformer cavern which accommodates the transformer to step up the voltage for transmission into the National Grid;
- the tailrace that carries water away from the turbines to Loch Ness; and
- various tunnels.
The disputed items included the water intakes, conduits, headrace, power cavern, transformer cavern, tailrace and access tunnels. In addition, the appellant claimed capital allowances on remedial works to the headrace and HMRC had rejected that claim.
The appellant argued that all of the items in dispute were items of plant (as that word is interpreted in the case law) and that expenditure on all of them was allowable unless specifically disallowed by CAA 2001, s. 21 or 22 and not saved by CAA 2001, s. 23.
HMRC argued that there was no real point in looking at whether the disputed items were plant at common law, as the expenditure on all of them was disqualified from allowances by either CAA 2001, s. 21 (in relation to the caverns) or CAA 2001, s. 22, and the savings in CAA 2001, s. 23, List C did not apply.
There were essentially two different types of water intakes:
- screen type intakes; and
- overflow intakes.
For the screen type intake, the Judge considered that all components were a single item of plant following the principles in IR Commrs v Barclay, Curle & Co Ltd;Barclay, Curle & Co Ltd v IR Commrs (1969) 45 TC 221. Although the overflow structures were different, the Judge considered that the intake pipe and concrete structure were still integrated into a single item of plant.
HMRC argued that the expenditure was disallowed as a dam or barrage and reservoir (CAA 2001, s. 22, List B item 4) or a weir (CAA 2001, s. 22, List B Item 6). Alternatively they were works involving the alteration of land (CAA 2001, s. 22(1)(b)).
The Tribunal rejected the description of the structures as reservoirs and dams as they accumulate and store water whereas the water intake structures extract a flow of water. The Tribunal considered that a barrage had a similar function to a dam or reservoir. The Tribunal also rejected the description as a weir after considering the Oxford English Dictionary definition and the fact that other structures in CAA 2001, s. 22, List B Item 6 that are designed to control or regulate water levels.
As the creation of the structures rather than the alteration of the land was the objective of the works, the Tribunal did not consider that CAA 2001, s. 22(1)(b) applied and to the extent that any expenditure was on alteration of land, such expenditure was incurred for the purpose only of installing plant or machinery, so CAA 2001, s. 23 List C Item 22 would exclude the application of CAA 2001, s. 22(1)(b).
The Tribunal concluded that all expenditure incurred on both types of water intake structures and associated headponds was allowable in full.
There were several types of conduit. These included:
- buried single plastic pipes;
- buried double plastic pipes,
- buried prefabricated concrete pipes,
- a drilled and blasted conduit lined with shotcrete;
- a buried conduit built in situ from reinforced concrete; and
- open channels lined with rocks.
The Tribunal considered the first three types of conduit together as it judged that the same analysis applied to all three types of prefabricated pipe. Following the reasoning in Bridge House (Reigate Hill) Ltd v Hinder (HMIT) (1971) 47 TC 182, the Tribunal considered the appellant to be the equivalent of the sewerage authority in that case and therefore the pipes were plant within the common law meaning. The Tribunal found that the individual pipes formed pipelines. It considered that the cost of the pipes and the costs of installing them was allowable. Even if any expenditure were disallowed by CAA 2001, s. 22, it would be saved by CAA 2001, s. 23, List C Item 25 as the provision of pipelines.
For the drilled and blasted underground conduit lined with shotcrete, the Tribunal concluded that this was an aqueduct with CAA 2001, s. 22, List B Item 1, but was not a tunnel. Despite the general transportation theme of Item 1, the Tribunal considered that it was sufficient that the conduit provided the transportation of water rather than the transportation of other things on water. The Tribunal then went on to review whether CAA 2001, s. 23 List C Item 22 applied. It considered that the only possible plant capable of being installed was the conduit itself. It commented that the two questions to be addressed were
- whether the expenditure on its creation can properly be regarded as being expenditure on the alteration of land; and
- whether any such alteration can fairly be regarded as for the purpose only of installing plant or machinery (where the relevant plant is the conduit itself).
The Tribunal viewed that the alteration of land involved in the creation of the aqueduct to have been carried out for the purpose only of installing the aqueduct and therefore it considered that allowances were available in full for the expenditure incurred in the creation, lining and stabilisation of the conduit.
For the cut and cover conduit built on site with reinforced concrete, the same initial analysis applied as for the drilled and blasted underground conduit lined with shotcrete i.e. that it was an aqueduct within CAA 2001, s. 22, List B Item 1. However, when looking at whether it was saved by CAA 2001, s. 23 List C Item 22, the difficultly for the appellant was that the reinforced concrete structure was the aqueduct rather than something being formed from the alteration of land. Although the conclusion was that the expenditure on the fabrication of the concrete conduit was not allowable, the costs of excavating and covering over the structure were allowable.
With the uncovered rock and concrete lined channels, the Tribunal also considered the same analysis applied as for the drilled and blasted underground conduit and therefore all of the expenditure was allowable.
As the headrace as a whole performs a plant-like function by delivering water at progressively increasing pressure, without significant leakage, from the reservoir to the turbine in the power cavern, the Tribunal considered it to be an item of plant at common law. It did not consider it to be an aqueduct as its purpose is more complex than transporting water and concluded that it did not fall within any of the structures in CAA 2001, s. 22, List B Item 1.
The headrace was made up of three sections. The bottom 85 metres contains a tapered steel pipe which attached to the main inlet valve. HMRC had already accepted that the cost of the pipe and associated boring of the headrace for this section qualified for allowances. The 200 metres above this was lined with reinforced concrete and the remainder was drilled through the rock and was stabilised with rock bolts and shotcrete where necessary. The Tribunal though that the manner in which these sections were created was more akin to the drill and blast conduits than the cut and cover conduits. Therefore, while the expenditure would be excluded from allowances by CAA 2001, s. 22(1)(b), it is saved by CAA 2001, s. 23, List C Item 22 and was allowable in full (including the remedial expenditure and the downstream access tunnel that was made for the purpose of installing the replacement section of headrace).
HMRC argued that either the caverns were works involving the alteration of land (CAA 2001, s. 22(1)(b)), or that they were a building (CAA 2001, s. 21). The Tribunal rejected the argument that the caverns were a building. The Tribunal agreed that the creation of the caverns amounted to works involving the alteration of land and could therefore only be saved if the expenditure was incurred for the purpose only of installing plant and machinery (CAA 2001, s. 23, List C, Item 22). The Tribunal decided that as the caverns themselves did not perform a plant like function, they were the setting or premises within which the generating trade could be conducted and therefore the expenditure on the creation of the caverns was not allowable.
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