Corporation tax – Capital allowances – Plant and machinery – Appellant constructing conservatory-type enclosure for swimming pool – Respondent commissioners refusing claim for capital allowances in respect of enclosure – Appellant appealing against decision – Whether enclosure constituting building or structure – Whether respondents making just and reasonable apportionment of consideration for qualifying assets – Appeal dismissed
The appellant company owned and operated a retirement home known as Bowerswood House, near Preston. It purchased the property as a going concern, in September 2004 for £940,000. Within the grounds, there was a swimming pool which was, at some stage, used by the residents of the nursing home. The swimming pool was enclosed by a large conservatory-type covering (the conservatory). For corporation tax purposes, the appellant was entitled to capital allowances in relation to the swimming pool itself. However, issues arose whether the conservatory was plant for the purposes of capital allowances; the appropriate method of apportionment of the purchase price paid for capital allowances purposes; and the cost of the swimming pool for capital allowances purposes.
The appellant claimed capital allowances in relation to plant and machinery included in the purchase price of the property in an amended corporation tax return. The amount claimed in relation to the swimming pool and the conservatory was £216,570. In a closure notice, the respondents reduced the claim to capital allowances in respect of the swimming pool using an apportionment formula and using a valuation for the swimming pool of approximately £45,000. The appellant contended that the value of the swimming pool ought to have been £84,000. The claim to capital allowances in relation to the conservatory was refused.
The appellant appealed. The principal issue was whether the conservatory was a building or structure so that no capital allowances were available unless it fell within section 23(2) of the Capital Allowances Act 2001 or List C. In relation to the swimming pool and the conservatory, if it qualified for capital allowances, there was an issue as to the just and reasonable apportionment of the price paid for the property as a whole in order to identify the cost of the swimming pool and the conservatory for capital allowance purposes. The respondents contended that an apportionment formula based on the value of the land and the replacement cost of the building and all assets purchased, as at the time of purchase, was just and reasonable. The appellant contended that the apportionment should be made on an asset-by-asset basis.
Held: The appeal was dismissed.
(1) The conservatory fully enclosed the swimming pool making use of an existing wall and three later walls upon which the frame, uPVC windows and polycarbonate sheeting were attached. No authority had been cited to the court as to the meaning of the word “building” in the present context, nor as to what distinguished a building from a structure. If the conservatory was a building or a fixed structure of any kind, it would not qualify for capital allowances unless it fell within section 23(2) or List C. In the present case, the tribunal was satisfied that the conservatory was plainly a building or a fixed structure. It was difficult to come up with a description of it without using the word structure. The fact that it was used to provide shelter and warmth for residents of the nursing home using the swimming pool did not alter that conclusion. It performs the functions of a building: Carr v Sayer [1992] STC 396; [1992] EGCS 59 considered.
(2) Section 28(1) of the 2001 Act expressly provided for capital allowances as plant for a taxpayer who incurred expenditure on “adding insulation against loss of heat to an industrial building occupied by him for the purposes of the trade”. Quite apart from the fact that the conservatory did not fall within the definition of an industrial building because no qualifying trade was carried on, that measure was plainly aimed only at adding thermal insulation to an existing building. The appellant had not identified any separate building to which thermal insulation was added. Although one of the purposes of the conservatory was to provide warmth for users, that did not mean that the conservatory itself falls within section 28 or thereby section 23(2). Item 16 of list C was limited to swimming pools and the respondents accepted that the swimming pool itself qualified for capital allowances. The purpose of Item 16, as with other items in List C, was to preserve the effect of previous judicial decisions as to the meaning of plant for capital allowance purposes. Buildings and structures were generally treated for those purposes as separate items from the plant and machinery which they housed: Wangaratta Woollen Mills Ltd v Federal Commissioner of Taxation (1969) 119 CLR 1 considered. Cooke v Beach Station Caravans Ltd [1974] STC 402 distinguished
Accordingly, the tribunal was satisfied that the conservatory was a building or fixed structure and was excluded from capital allowances by sections 21 or 22 of the 2001 Act. Those sections were not disapplied by section 23 because the conservatory did not fall within section 23(2) or List C.
(3) The appellant had submitted that the appropriate way to identify the cost of plant and machinery was simply to identify the replacement cost of the pool and structure, together with the replacement cost of other plant and machinery. That approach was flawed because it did not identify the value of all assets purchased on the same basis. It identified the replacement cost of the assets qualifying for capital allowances and simply left all other assets to be valued by reference to a balancing figure. That did not amount to a just and reasonable apportionment. If there were to be a valuation on an asset by asset basis it would have to be undertaken in relation to all assets and on the same valuation basis. The provision in section 562(3) of the 2001 Act was designed to avoid the inherent difficulties with such an approach. In the circumstances, the respondents’ formula gave a just and reasonable result. In order to apply that formula it was necessary to identify the replacement cost of the swimming pool. The appeal would continue in relation to the value of the swimming pool for the purpose of applying the apportionment formula.
Iain Clarke, of Downham Mayer Clarke & Co, chartered accountants, appeared for the appellant; John Helm, of HM Revenue and Customs, appeared for the respondents.
Eileen O’Grady, barrister