Urenco Chemplants Ltd v R & C Commissioners
| Jurisdiction | UK Non-devolved |
| Judgment Date | 28 January 2022 |
| Neutral Citation | [2022] UKUT 22 (TCC) |
| Court | Upper Tribunal (Tax and Chancery Chamber) |
[2022] UKUT 22 (TCC)
Upper Tribunal (Tax and Chancery Chamber)
Mr Justice Mellor, Judge Thomas Scott
Jonathan Peacock QC and Michael Ripley, instructed by Enyo Law LLP, appeared for the appellants
Jonathan Bremner QC and Edward Waldegrave, instructed by the General Counsel and Solicitor to HM Revenue and Customs, appeared for the respondents
Corporation tax – Capital allowances – Expenditure on construction of a tails management facility at a nuclear site – Whether items functioned as plant – Application of functionality test in relevant business – Whether expenditure on certain items was on the provision of plant – Whether items which were otherwise plant were ineligible for allowances because they were buildings – Whether any items which were buildings were saved by List C in CAA 2001, s. 23 – FTT decisions set aside – Case remitted to the FTT.
The Upper Tribunal (UT) set aside the decision of the First-tier Tribunal (FTT) (Urenco Chemplants Ltd [2019] TC 07318) that capital allowances were not due on certain expenditure related to the construction of a nuclear site, and remitted the case to the FTT.
This was an appeal by Urenco Chemplants Ltd and Urenco UK Ltd (together, Urenco) against the decision of the FTT that capital allowances could not be claimed in respect of certain expenditure (the disputed expenditure) incurred in the construction of a nuclear deconversion facility. In coming to its decision, the FTT found that while some of the disputed items were plant, none of the disputed expenditure qualified for plant and machinery allowances due to the exclusion for buildings at CAA 2001, s. 21.
Urenco appealed to the UT on the following grounds:
- The FTT had misclassified the safety functions of assets used in shielding, containment and seismic qualification as being merely part of the setting, as opposed to being assets used in the business and having plant-like functions.Held: The functionality test must be applied by reference to the business as it is actually carried on. The FTT misunderstood or misapplied the functionality test in concluding that, without the safety significant structures, the processes could still be carried on efficiently. This was not the case as the regulatory environment would not permit it to happen.
- The FTT had unduly restricted the expenditure which qualified as being on the provision of plant or machinery under case law principles.Held in part: The FTT erred in law in deciding that the expenditure on the walls and slab in the Vaporisation Facility was not incurred on the provision of plant or machinery. The fact that the walls and slab themselves performed a premises type function was not material to whether expenditure on those items was on the provision of plant.
- The FTT had taken an erroneous approach to determining whether an asset is a building for the purposes of s. 21. Held. The FTT erred in law in several inter-related respects, including: (1) in taking as its starting point the ordinary everyday meaning of building, and not acknowledging or discussing the various potential everyday meanings of that term and to consider which of them might best accord with a purposive construction of s. 21; (2) in focusing on appearance or characteristics rather than on function; and (3) in considering function, to place weight not on the predominant functions of the facilities, but on actual or potential functions considered consistent with a building.
- The FTT had erroneously identified and classified the relevant purposes of the alterations of land for the purposes of List C, Item 22 in s. 23.Dismissed. Although the FTT had accepted that Urenco's purposes in incurring the expenditure included the installation of plant and machinery, the FTT was entitled to find that Urenco also had other purposes, and so that the expenditure fell outside the saving in Item 22.
- The FTT had failed to identify that expenditure on the provision of assets falling within List C, Items 1 and 4 can qualify for allowances, even if it is not expenditure on purchasing the machinery or processing equipment.Dismissed. The UT rejected Urenco's argument that the failure to include expenditure on the provision of Items 1 to 16 was a clear and obvious drafting slip arising out of the work of the Tax Law Rewrite Project.
The UT set aside the FTT's decisions that:
- with the exceptions found by the FTT, the disputed expenditure was not on the provision of plant or machinery;
- expenditure on the walls and slab in the Vaporisation Facility was not on the provision of plant or machinery; and
- all of the disputed expenditure was prevented from being eligible for plant and machinery allowances by s. 21.
The case was remitted to the FTT to remake those decisions.
Although few businesses will incur expenditure on the types of assets considered here, the decision does contain useful summaries of case law relevant to many capital allowances claims, for example, on the principles to be considered in deciding whether an item functions as plant in the carrying on of the business or merely as the premises or setting for the business.
[1] This appeal concerns entitlement to capital allowances in respect of expenditure on a major construction project. The First-tier Tribunal (“FTT”) held that allowances were not available in respect of certain disputed expenditure of approximately £192m incurred on the construction of a substantial nuclear deconversion facility at Capenhurst in Cheshire. The Appellants appeal against that decision with permission of the FTT.
[2] The allowances in dispute are those available for expenditure on the provision of plant and machinery. There are no procedural issues in dispute. The various issues relate to three questions. First, was the item in question plant? Second, if so, was the relevant expenditure nevertheless ineligible for allowances because the item was a building? Third, if the building exclusion would otherwise apply, was the item in question saved by one of the specific carve-outs in the legislation?
[3] The Appellants, Urenco Chemplants Limited and Urenco UK Limited (together “Urenco”), are members of the Urenco corporate group. The group provides approximately 30% of the global enriched uranium supply for the civil nuclear industry and has uranium enrichment plants in the UK, Germany, the Netherlands and the USA. The UK facility is located at Capenhurst in Cheshire.
[4] Depleted uranium hexafluoride, or “Tails”, is a radioactive and highly toxic by-product of uranium enrichment. The disputed expenditure relates to a facility known as the Tails Management Facility (“TMF”) which was constructed to process Tails safely by way of “deconversion”.
[5] Construction of the TMF was substantially completed in 2018, at a total cost of £1bn. The treatment for capital allowances of most of that expenditure was agreed. The dispute relates to some £192m of expenditure which HMRC did not accept was eligible (the “Disputed Expenditure”). The only issue in this appeal is whether Urenco is entitled to capital allowances in respect of the Disputed Expenditure, which relates to particular items within the facilities summarised below.
[6] Tails are radioactive, unstable, highly corrosive and toxic. The deconversion process carried out in the TMF involves removing the fluorine content of the Tails in the form of hydrofluoric acid, leaving a stable but still radioactive uranium oxide compound which can be stored more easily. The hydrofluoric acid which is produced can be sold for industrial use, unless it has any radioactive contamination, in which case it is safely destroyed. The uranium oxide will be stored at the TMF.
[7] The TMF processes Tails from Urenco's facilities in the UK, Germany and the Netherlands. The TMF has 8–10 operators on shift at any one time. Certain areas are designed to be unoccupied save for necessary inspection and maintenance purposes.
[8] The key five facilities at the TMF operate as follows:
- The Cylinder Handling Facility (CHF): Tails arrive at the TMF in large cylinders transported by lorry. Once at the receipt and dispatch area of the CHF, the cylinders are placed on cradles before being transported via an internal rail system to the vaporisation facility. Once emptied, the cylinders remain radioactive and are returned to the CHF to cool down for a period of 90–100 days.
- The Vaporisation Facility: in the vaporisation facility, full cylinders are heated in autoclaves and the Tails, in gaseous form, are extracted and transferred through a network of pipes to the kiln facility.
- The Kiln Facility: this contains two kilns which carry out the deconversion process, producing uranium oxide in powder form and hydrofluoric acid.
- The Condenser Facility: the hydrofluoric acid generated by the deconversion process is transferred to this facility, where it is refined to a liquid state in which it can be sold.
- The Uranium Oxide Store (UOS): the uranium oxide generated by deconversion is loaded in powder form into steel storage containers knowns as DV70s. These are transferred to the UOS and stored for up to 100 years.
[9] We discuss below the stringent regulatory and health and safety requirements imposed on Urenco in respect of the design, construction and operation of the TMF.
[10] The Annex to this decision contains some simplified block diagrams, taken from the Decision, which show the various facilities and components. They are colour-coded and identify the elements of each structure and the main equipment and machinery in that structure. Items in dispute are separately identified.
[11] Unless specified otherwise, references below are to the Capital Allowances Act 2001 (“CAA”).
[12] Plant and machinery allowances are provided for by section 11, which states as follows:
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