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Capital Allowances Case - Incidental Expenditure

Capital Allowances Tax Case Review

Expenditure Incidental to the Installation of Plant and Machinery into an Existing Building

B&E Security Systems Limited V HMRC Commissioners [2010] UKFTT 146 (TC)

Tribunal Release Date: 26th March 2010

Summary

The taxpayer built a control room to house surveillance monitoring equipment.  It successfully claimed capital allowances on the expenditure as ‘plant’ because it was incurred on alterations to an existing building incidental to the installation of plant and machinery.

Background

The taxpayer installed, maintained and monitored intruder alarms.  It broadened its activities to carry out sensitive surveillance work and won monitoring contracts for two government agencies and a large town.

 

The pursuit of these contracts required the construction of a specialised control room to house new surveillance monitoring equipment.  This was created by altering a room in an already occupied building.  The works cost around £61,000.  They included independent power supplies (including a generator and backup batteries); raised access flooring for cabling; strengthening walls, floors and ceilings; fire proof security doors and an interlock; and independent amenities (including washroom facilities and a kitchen).  Computers, screens, monitoring devices and other equipment costing about £79,000 were then installed.

Relevant Law/ Practice

HM Revenue & Customs (‘HMRC’) accepted that the security monitoring equipment qualified for plant and machinery allowances under basic principles (ie, it was ‘apparatus’ of the business). 

 

Section 25 of the Capital Allowances Act 2001 (‘CAA 2001’) also permits the cost of alterations to an existing building incidental to the installation of machinery and plant to qualify for capital allowances.  In effect, statute deems those alterations to be part of the cost of the actual plant.  The taxpayer considered that the control room construction qualified for capital allowances under this rule.  HMRC disagreed.

Tax Tribunal Decision

The first-tier tribunal found in favour of the taxpayer.  It held that the control room expenditure was incidental to the plant and machinery (that is, the surveillance monitoring equipment).

 

Following the recent decision in Wetherspoon (JD) plc v HMRC Commrs [2007] UKSPC SPC00657, the tribunal considered that there had to be a sufficient ‘nexus’ (ie, connection or link) between the installation of the security equipment and the building alterations.  First, the building works only had to be carried out because the company pursued and secured the security contracts.  Second, the works became necessary, and in practical terms inevitable, once those contracts had been won and the company was obliged to buy the surveillance equipment.  Third, the company had little discretion, if any, over the precise works carried out.  Finally the word ‘incidental’ suggests something that must be subordinate or secondary to the actual plant, and the tribunal concluded that the circa £61,000 control room costs were not disproportionate to the £79,000 spent on equipment.

Our View

The rule now set out in section 25 CAA 2001 was introduced in the Income Tax Act 1945.  Hansard debate from the time makes clear that it was aimed at works such as modernising hotels, which required the installation of hot and cold water, bathrooms, lifts and air conditioning etc. The provision was intended to allow incidental works to qualify, such as partitioning larger rooms to install bathrooms, or fitting double-glazed windows to make air-conditioning effective. The intention was therefore for the legislation to apply quite widely.

 

Despite this, and the age of the legislation, HMRC routinely disagrees with its application, narrowly asserting that to qualify, any alterations must be incidental to the physical act of installing the plant (eg, forming holes etc. - which should qualify for capital allowances anyway under basic principles, as part of the ‘provision’ of plant).

 

It was not surprising that the tribunal found in the taxpayer’s favour in B&E Security.  This was a welcome rejection of HMRC’s typical stance.

 

View and save Capital Allowances Tax Case Review - B&E Security Systems v  HMRC Commissioners as a PDF file.  

 

 B&E Security Systems Limited V HMRC Commissioners [2010] UKFTT 146 (TCView and sav

Tags for this article: tax case, capital allowances, plant, machinery, incidental expenditure, alterations

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