The Commissioners for HM Revenue and Customs v SSE Generation Ltd

JurisdictionUK Non-devolved
JudgeJudge Herrington,Judge Brannan
Neutral Citation[2019] UKUT 0332 (TCC)
CourtUpper Tribunal (Tax and Chancery Chamber)
Subject MatterTax,4 November 2019
Date04 November 2019
Published date04 November 2019
[2019] UKUT 0332 (TCC)
Appeal number:UT/2018/0143
CORPORATION TAX capital allowances - eligibility of various structures of a
hydroelectric power generation scheme for capital allowances - ss 11 and 21 to 23
Capital Allowances Act 2001
UPPER TRIBUNAL
TAX AND CHANCERY CHAMBER
THE COMMISSIONERS FOR HER MAJESTY’S
REVENUE AND CUSTOMS
Appellants
- and -
SSE GENERATION LIMITED
Respondent
TRIBUNAL:
Judge Timothy Herrington
Judge Guy Brannan
Sitting in public at The Royal Courts of Justice, Strand, London WC2 on 10 and
11 September 2019
Timothy Brennan QC and Aparna Nathan QC, instructed by the General
Counsel and Solicitor to HM Revenue and Customs, for the Appellants
Jonathan Peacock QC and Michael Ripley, Counsel, for the Respondent
© CROWN COPYRIGHT 2019
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DECISION
Introduction
1. The appellants (“HMRC”) appeal against a decision by the First-tier Tribunal
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(“FTT”) (Judge Kevin Poole) released on 31 July 2018 (the “Decision”). The FTT
allowed in part the appeal of SSE Generation Limited (“SSEG”) against the
conclusions in various closure notices for the years ending 31 March 2006 to 31
March 2012 to the effect that SSEG’s taxable profits for those years had been
understated as a result of claims for capital allowances in respect of fixed asset
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expenditure in relation to the Glendoe Hydro Electric Power Scheme (the “Scheme”).
Capital allowances had been claimed on some £260 million of expenditure on the
Scheme, only some £34 million of which was originally accepted by HMRC.
Approximately £200 million of expenditure remains in dispute following the
Decision.
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2. The Decision concerned the tax treatment of a number of assets constructed by
SSEG for the purposes of the Scheme. The assets concerned were a group of long-life
infrastructure assets. SSEG contends that the relevant assets are “plant” and that the
relevant expenditure was expenditure “on the provision of plant” for the purposes of
Part 2 of the Capital Allowances Act 2001 (“CAA 2001”). The dispute was in relation
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not to the generator turbine (which was accepted was eligible for allowances) but to
works of civil engineering which enabled water to be taken into and from a dammed
area and channelled under high pressure to the turbine to generate electricity and for
the used water to be discharged into Loch Ness.
3. The FTT decided that in principle the expenditure incurred on a considerable
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number of the items was allowable as expenditure incurred on the provision of plant
or machinery but that the expenditure on a number of the items claimed was not so
allowable. HMRC have not appealed against a number of the findings made against
them but pursue an appeal with the permission of the FTT against the findings in
respect of the most substantial items. In their Respondent’s Notice SSEG seek to
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challenge the FTT’s findings in respect of certain expenditure on a particular structure
which the FTT found not to be allowable in part.
The Facts
4. The FTT made detailed findings of fact at [7] to [18] as to the background,
construction and operation of the Scheme, based on the witness evidence of Mr Jim
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Smith, Managing Director of SSEG, the documentary materials before it and a site
visit. So far as is relevant to this appeal, we summarise those findings as follows.
5. At [11] the FTT described the various elements of the Scheme, starting from the
highest point of the Scheme and working down. Shorn of the detail which is not
required for the purposes of this appeal the essential elements by reference to the
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numbered sub-paragraphs of [11] of the Decision are:
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(1) Water intakes. The Scheme uses water, collected over two discrete natural
catchment areas totalling some 75 square kilometres. A network of main water
intakes and minor water intakes from various different streams feeds part of that water
into a network of conduits of various types which form the next part of the Scheme.
(2) Conduits. Once diverted from the natural streams, the water is channelled
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through a network of just under 12 km of conduits into a main reservoir. More detail
about the different types of conduit was given at [15] of the decision, as set out at [8]
below.
(3) Reservoir and dam. The conduits run into a main reservoir which is formed
behind a concrete-faced rock-filled dam sited at the head of a gorge down which the
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river Tarff runs. The capacity of the reservoir is 12.7 million cubic metres. No claim
has been made for plant or machinery allowances in relation to the dam and reservoir.
(4) Main intake. Beside the dam there is an intake through which water is allowed
to pass into the headrace, the next element of the Scheme. The intake can be closed in
order to cut off the flow of water into the headrace. There is no dispute about plant or
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machinery allowances in relation to the main intake.
(5) Headrace. This is the technical name for the conduit which carries the water,
under increasing pressure as it moves downward, from the main intake at the reservoir
to the generating equipment in the caverns referred to below. The headrace is 6.2km
long and 5 metres in diameter and is entirely underground, created with a tunnel
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boring machine. In some similar schemes, the headrace runs along the surface of the
ground and is made of concrete or steel pipes. At Glendoe, the choice to use a
subterranean shaft was driven partly by engineering considerations and partly to
minimise the environmental impact of the Scheme. At the foot of the headrace the
last 85 metres contains a tapering steel lining which attaches directly to the inlet valve
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adjacent to the turbine, and the 220 metres above that was constructed with a
reinforced concrete lining inside the shaft. The main section of the headrace above
that 220 metre section was partly stabilised with rock bolts and lined with shotcrete
(concrete sprayed onto the rock surface at high pressure, which strengthens the rock
walls), where geological conditions require it. At the foot of the headrace, the water
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is under a pressure of approximately 900lb/in2 and the steel-lined and reinforced
concrete-lined sections (in addition to providing a properly engineered connection to
the turbine inlet valve) prevent the water pressure from bursting through the rock and
flooding the power cavern.
(6) Power cavern. This is the name given to the main cavern which houses the
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turbine and generation equipment.
(7) Transformer cavern. A much smaller cavern, set off to the side of the power
cavern adjacent to the entrance to the main access tunnel, was excavated to
accommodate the transformer which “steps up” the voltage of 15.75kV produced by
the generator to 132kV for transmission into the National Grid.
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