Taxation – Capital allowances – Qualifying expenditure – Respondent claiming capital allowances on expenditure incurred when constructing hydro-electric power station – Issue arising as to eligibility of disputed items – Whether items constructed for collection and transmission of water to, through and from power station were “tunnel” or “aqueduct” disqualified from relief under section 22 List B of Chapter 3, Part 2 of Capital Allowances Act 2001 – Appeal dismissed
The respondent, a UK incorporated wholly-owned subsidiary of a broad-based energy company, constructed and operated a state-of-the-art hydro-electric scheme at Glendoe, Fort Augustus, in Scotland.
The respondent claimed capital allowances on expenditure incurred when constructing the power station. The value of the expenditure on the disputed items was around £200m.
An issue arose whether items constructed for the collection and transmission of water to, through and from the power station were a “tunnel” or an “aqueduct” within the meaning of section 22 List B of Chapter 3, Part 2 of the Capital Allowances Act 2001, which disqualified from relief expenditure on “a tunnel, bridge, viaduct, aqueduct, embankment or cutting”. If they were, the expenditure on the items did not qualify for relief unless List C in section 23 of the 2001 Act applied.
Such allowances might be deducted from income for the purpose of calculating the trading profits subject to corporation tax.
The appellant commissioners considered that the disputed items did not give rise to allowable expenditure under the 2001 Act.
The First-tier Tribunal (FTT) held that the respondent was entitled to some of the allowances claimed. HMRC appealed to the Upper Tribunal which dismissed the appeal and allowed the respondent’s challenge to parts of the FTT’s decision.
Consequently, the FTT remade the decision largely in respondent’s favour. The appellants’ appeal to the Court of Appeal was allowed in part: [2021] EWCA Civ 105. The appellants appealed.
Held: The appeal was dismissed.
(1) The Court of Appeal had identified two possible ordinary meanings of the words “tunnel” and “aqueduct”. Where there were two ordinary meanings, there was no reason for making an a priori assumption that the wider meaning should be taken.
There was nothing in List B Items 1 to 6 to indicate an intention to cast the net as widely as possible, and the existence of item 7 indicated that there was no need to do so.
One ordinary meaning of “tunnel” covered any underground passage, whether used for people, for vehicles, for animals, for transmitting substances such as air for ventilation, other gases, water, or used for other items such as utility lines or pipes, permitting transmission of power.
However, another ordinary meaning given by the Oxford English Dictionary (OED) was “a roadway excavated underground”.
Where there was no clear, single ordinary meaning, the Court of Appeal and the tribunals below were correct to consider the context and whether that assisted in identifying the correct meaning.
It was clear that a different drafting technique had been used in List B (where items were grouped) and List C (where items were listed). In List B a choice had been made to identify specific structures which were to be excluded in all cases, group those structures in separate lists and decide the list to which each structure belonged.
It was reasonable to conclude that those grouping choices were made for a thematic reason, if such could be identified.
(2) A “tunnel” was a subterranean passage through an obstacle for a way (such as a railway, road, or canal) to pass through. A “bridge” and a “viaduct” permitted vehicles or pedestrians to travel over an obstacle. A “cutting” and an “embankment” were other structures resulting from clearing obstacles in constructing a road, railway or inland navigation.
Each of the other items in List B were also grouped thematically. Items 2 and 3 listed transportation assets which typically related to navigation or movement by land and by water respectively. Item 4 listed assets for harnessing or containing water. Item 5 listed structures at which vessels might be moored or merchandise might be shipped/unshipped. Item 6 listed flood defences.
An underground passageway could have a primary purpose of carrying utility conduits. Indeed, the transformer cable tunnel in the Glendoe Scheme (through which people might pass to access the transformer cavern but which was primarily used to carry electricity cables) might be said to be an example of such a structure. Moreover, that might explain why both underground “tunnels” and “ducts” were referred to in Item 25. On the appellant’s case “ducts” added nothing to “tunnels” since all underground “ducts” would also be “tunnels”.
Therefore, the meaning given to “tunnel” by the Court of Appeal was clear and drew a line in the sand. Drawing an objectively reasonable contextual inference as to the meaning intended was not speculative.
Words and phrases in a statute derived their meaning from their context. The meaning of the word “tunnel” in List B, Item 1 depended on its context which identified which ordinary meaning of the word was intended and in this case that was a subterranean passage for a way to pass through.
(3) In context, “aqueduct” was listed immediately after “bridge, viaduct” and connoted a bridge-like structure for carrying water (such as where a canal was carried over a river or valley). That was its most common meaning and it made good sense in its contextual setting.
The general theme underlying the grouping of Item 1 structures compelled the conclusion that the meaning of “aqueduct” was limited to the carrying of canals. That was certainly included but it was not required.
“Aqueduct” differed from the other words used in Item 1 as it specifically identified what the way was for, namely “aqua” or water. That justified a wider meaning being given to that particular term but it did not undermine the general theme running through Item 1. There was no need for complete congruity and there was sufficient family resemblance between all terms used.
(4) If, as on the appellants’ case, “aqueduct” simply meant a water conduit, it would be very surprising for it to be listed after “bridge, viaduct” and in the same grouping as “tunnel”, “embankment” and “cutting”, as it had nothing in common with those items. It would also render largely otiose other water conduits specifically included in List B, such as canals (item 3), dike and drainage ditched (item 6).
Timothy Brennan KC and Aparna Nathan KC (instructed by HMRC Solicitor’s Office and Legal Services) appeared for the appellant; Jonathan Peacock KC and Michael Ripley (instructed by CMS Cameron McKenna Nabarro Olswang LLP) appeared for the respondent.
Eileen O’Grady, barrister
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