Without context, the word can take on a plethora of different meanings.  Give it some context, i.e. capital allowances, and one would hope that the definition becomes more obvious.  The recently released first tier tribunal decision from SSE Generation Ltd v HMRC [2018], appears at least, to have only added to the incoherent nature of the term.

The case surrounds a £300 million hydroelectric power generation scheme near Loch Ness in Scotland.  SSE claimed allowances on £260 million of the expenditure which on review, HMRC unsurprisingly disagreed with.

Of the amount claimed, HMRC accepted just £34 million, leaving around £227 million in dispute.  Such was the size of the project and the disagreed figures, both sides agreed that a decision in principle of the component parts of the scheme, under part two of CAA2001, would be the best way forward, with the quantum being agreed at a later stage.

As with many renewable energy installations, many of the main costs of a project are adjustments of the landscape to allow the P&M to be installed. The Capital Allowances Act s22, expressly highlights ‘works involving the alteration of land’ as not being eligible for allowances as part of the provision of plant and machinery.

However, in installations such as a hydroelectric scheme, much of the alteration of land occurs only for the installation of plant and machinery, and is therefore saved by item 22 in list C. Further to this, the argument was made, and accepted by the tribunal in points, that the alterations to the land in much of the SSE claim came about, not to allow the installation of plant and machinery, but to create plant and machinery.

The tribunal accepted that in many of the circumstances claimed by SSE, the alteration of the land was in fact the actual creation of a piece of plant. Intriguingly, on other points, the tribunal found that the costs of the land alterations would be allowable, even where the cost of the plant would not.  An example of this point surrounded an in situ concrete conduit, where the tribunal allowed preparatory excavations and the subsequent re-covering, but not the creation of the conduit itself. The argument for this was that the conduit was disqualified as an aqueduct, under item 1 list B, but the costs of the land work around the installation qualify as they were undertaken solely for the installation of the aqueduct.

The outcome of the tribunal will likely carry weight going forwards, especially in cases where the alteration of land is involved.  HMRC has been shot down in their view that ALL costs involving the alteration of land should fall under s22 (1) (b) CAA 2001, and the Judge in this tribunal has pained to highlight the reasoning behind the decisions to give guidance going forward.  The case has put doubt to a number of long held capital allowance fundamentals, and will be watched with interest by companies involved in large scale renewable or infrastructure projects.  As the FTT found mainly in the taxpayers favour, it will be interesting to see if HMRC appeal going forward.

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