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Capital allowance - Taxpayer company converting existing buildings into large public houses

J D Wetherspoon plc v Revene and Customs Commissioners: Upper Tribunal (Tax and Chancery Chamber) (Tax and Chancery Chamber) (Mr Justice Michael Briggs and Judge Howard Nowlan): 31 January 2012

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The company taxpayer had a substantial reputation for the conversion of existing buildings of various types into large public houses. During the accounting year ending July 1999 (the relevant period), the taxpayer had fitted-out 288 projects. With regard to those projects, the taxpayer claimed for capital allowances for expenditure on the fitting-out and refurbishing of public houses which had been made for the relevant period. The respondent Revenue and Customs Commissioners (the Revenue) disallowed the claim. The taxpayer challenged that decision, first to the Special Commissions (the commissioners) and then to the First-tier Tribunal (Tax and Chancery Chamber) (the FTT).

In order to limit the purview of the claim, two public houses were identified as test cases, of which one public house (the Prince of Wales) remained throughout the litigation as the predominant test case. The findings in relation to the Prince of Wales were to be adopted throughout the taxpayer’s portfolio. The matters in dispute related to, inter alia, plant and premises under section 24 of the Capital Allowances Act 1990 (the 1990 act), incidental expenditure under section 66 of the 1990 act, and the apportionment of preliminary items.

The commissioners and the FTT categorised four decorative items included in the fit-out of the public parts of the Prince of Wales as failing to qualify as plant under section 24 of the act because they had become part of the premises. Those items consisted of panelling, cornices and architraves and metal-end pieces to balustrades. With regard to the panelling, the FTT found that because the decorative panelling effectively turned the premises from an unpanelled room into a room which was mainly panelled, it was an 'unexceptional component' of the type of premises. The FTT drew support by the treatment in paragraph 1(2) of schedule AA1 to the 1990 act of any asset in a building which was not incorporated into the building but was of a kind normally incorporated into buildings as being effectively part of it.

The result was that the panelling was more appropriately to be described as having become part of the premises than having retained a separate identity. Accordingly, the FTT concluded that it had not qualified as plant. The commissioners and the FTT also adopted a narrow construction of the phrase, as contained in section 66 of the act, 'capital expenditure on alterations to an existing building incidental to the installation of machinery and plant for the purposes of the trade', and excluded expenditure on substantial parts of the kitchen and toilet areas constructed and fitted-out at the Prince of Wales. Further, the FTT permitted expenditure on certain preliminary items to be apportioned by reference to the ratio between qualifying and non-qualifying works within the project for refurbishment of the Prince of Wales as a whole. The taxpayer appealed to the Upper Tribunal (Tax and Chancery Chamber) (the tribunal) against the decisions in relations to section 24 and section 66 of the act. The Revenue appealed the decisions in relation to section 66 of the act and further appealed the FTT's finding in regard to apportionment.

The taxpayer submitted, first, in regard to the panelling, cornices and architraves and metal-end pieces to balustrades, that the FTT's reliance on what might be labelled 'the unexceptional component' consideration, represented the erection of a new and wholly illegitimate legal test, and the tribunal's reference to paragraph 1(2) of schedule AA1 to the act was wholly illegitimate in a case in which neither party had submitted that schedule AA1 had any direct application (the panelling issue). Secondly, with regard to section 66 of the act, the taxpayer submitted that 'expenditure on alterations to existing buildings, incidental to the installation of plant' had included any expenditure incidental to the installation directed to making the plant more usable.

Accordingly, allowances would be available for expenditure in relation to existing buildings under section 66 of the act for many items that might equally have been needed in constructing kitchens, toilets and cold rooms in new buildings, regardless of the fact that none, or hardly any, of them would qualify for allowances when the same plant was installed in a new, purpose built, building (the pro-rata issue). The Revenue contended that the FTT had been wrong to have permitted expenditure on certain preliminary items to be apportioned by reference to the ratio between qualifying and non-qualifying works within the project for refurbishment of the Prince of Wales as a whole, because those items were 'trade specific' and it had therefore been incumbent on the taxpayer to prove the precise amount of the expended upon qualifying works.

The tribunal ruled: (1) The applicable legal principle to be applied was to ascertain whether, in all the circumstances, the panelling had retained its separate identity, or had lost it by becoming part of the premises. The FTT had by no means been seeking to lay down some principle of general application in its use of the phrase 'the unexceptional component', but was rather explaining its reasoning in relation to the borderline item constituted by the panelling. It was, in the FTT's view, ordinary panelling which simply turned what would otherwise have been an unpanelled room into a mainly panelled room.

Further, there was nothing wrong with the FTT's use of the analogy with schedule AA1 of the 1990 act. The FTT had correctly recognised that item 14 in column 2 of table 1 of schedule AA1 had been included as a form of shorthand for decorative embellishments of the type allowed, by contrast with items which either were or, in the ordinary course would usually be, incorporated into buildings. It had been clear that the FTT had never lost sight of the fact the applicable legal principle. The instant case was not one in which the FTT, having apparently stated the law correctly, had then lost sight of it in considering the facts (see [28]-[30] of the judgment).

Accordingly, the taxpayer's appeal on the panelling issue would be dismissed (see [35] of the judgment). IRC v Scottish and Newcastle Breweries Ltd [1982] 2 All ER 230 considered; Wimpy International Ltd v Warland (Inspector of Taxes); Associated Restaurants Ltd v Warland (Inspector of Taxes) [1989] STC 273 considered.

(2) The purpose of section 66 of the act was that if plant was installed in an existing building rather than a purpose-built new building, it had been entirely possible that something would not fit, and that that would lead to alterations having to be made to the existing building. In the case of a purpose-built new building, there would generally be no equivalent need for such expenditure. Thus, section 66 levelled the playing field between new and existing buildings by affording taxpayers relief for expenditure on existing buildings which would not have been needed in relation to the installation of the same plant in new buildings, or in the open. The question was, in relation to each disputed alteration, whether the expenditure was truly incidental to the installation of the plant (see [54], [56] of the judgment).

Therefore, the taxpayer's appeal in relation to section 66 of the 1990 act would be dismissed. The Revenue's appeal in relation to the strengthening of the kitchen floor, and the drainage work required in the cold store would be dismissed. However, the Revenue's cross-appeal in relation to all the expenditure claimed under section 66 of the act in the toilet area, except the expenditure on the non-block work cubicle partitions would be allowed. The commissioners and the FTT had been correct to place considerable reliance on there being a required 'nexus' between the installation of plant and the alterations to the building (see [54],[55], [56], [58], [63], [65], [72] [91] of the judgment). IRC v Barclay Curle & Co Ltd [1968] SLT 385 considered.

(3) The FTT had been right in its conclusion that a pro-rata apportionment of the relevant items, and of any preliminaries where a detailed item by item attribution would be disproportionately time consuming or expensive, had been a legitimate basis for claiming capital allowances for preliminaries, because it had been a reasonable, common-sense solution which had accorded with generally accepted accounting practice. It could not have been the intention of the legislature that a trader should have to spend more on the minute attribution of preliminaries to underlying items of work than either their cost or the value of the capital allowance thereby to be obtained (see [97], [98] of the judgment). The Revenue's cross appeal in respect of the pro-rata issue would be dismissed (see [98] of the judgment).

Julian Ghosh QC, James Henderson and Jonathan Bremner (instructed by Deloitte LLP) for the taxpayer.Timothy Brennan QC and Rupert Baldry QC (instructed by General Counsel and Solicitor for the Revenue and Customs Commissioners) for the Revenue.

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