Court of Appeals Rejects Capital Allowances For Urenco Nuclear Waste Facility
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The Court of Appeals recently handed down its judgment in Urenco v HMRC. The dispute pertained to capital allowances under the Capital Allowances Act 2001 (‘CAA 2001’) for expenditure on construction of a specialised deconversion facility for nuclear waste. Allowing HMRC’s appeal in entirety, the Upper Tribunal’s ruling was overturned and that of the First Tier Tribunal reinstated, while Urenco’s cross-appeal was partially allowed.
The decision gives important guidance on the meaning of ‘plant’ and ‘premises’, and is an interesting case study on capital allowances in the context of specialised activities governed by strict regulations such as nuclear waste processing. The CA’s stance on what are ‘errors of law’ and when appellate interference is permitted is also likely to have broader ramifications.
This post analyses the decision on the first issue, viz, Ground 2 of HMRC’s appeal regarding Urenco’s assets used in shielding, containment and seismic qualification (‘Disputed Items’). We contend that the CA erred in restoring the FTT’s ruling that the Disputed Items were not ‘plant’ for the purposes of CAA 2001, since the FTT had misapplied or misunderstood the ‘functionality test’.
The functionality test
The general statutory rule regarding capital allowances is that the expenditure must be ‘on the provision of plant or machinery’. As there is no statutory definition of ‘plant’, characterisation is determined under common law.
The starting point is the landmark expression that plant includes the apparatus used for carrying on business, but not stock-in-trade. The next step is a ‘functional test’, which considers the operation performed by the relevant asset in the business.
The test was well-settled at the time of the decision, and recently reiterated by the CA. In summation, an asset utilised in the trade is to be distinguished from the ‘premises’ on which the trade is carried on—referred to as the ‘premises test’. Simply stated, an asset will be a plant if it aids in carrying on business activities, and premises if it plays no such part but is merely the place for carrying on activities.
The two are not mutually exclusive, and premises can also be a plant if the function fulfilled in the trader’s operations is as a plant. A judicial determination then involves evaluating whether it is ‘more appropriate’ to describe the asset as plant or premises. Thus, the distinction cannot be generalised and depends upon the relevant facts, including the taxpayer’s trade.
Divergence vis-à-vis the Disputed Items
Placing reliance upon Wangaratta, Urenco’s contention was that the Disputed Items all performed a function in its trade and constituted plant, even if the structures could also be described as premises. Radiological hazards were a direct result of Urenco’s processes, and the safety features of the Disputed Items were an essential part of the trade processes. Against this, the FTT held that the Disputed Items merely constituted premises.
This was deemed by the UT to be vitiated by a misunderstanding or misapplication of the functionality test to the Disputed Items on three bases of reasoning adopted by the FTT: (a) the irrelevance of regulatory norms and the hypothetical undertaking of Urenco’s business without the Disputed Items, (b) the Disputed Items playing a more passive function in the ‘actual processing’ at the facility, and (c) the manner of distinguishing Wangaratta.
Analysis of the CA decision
On appeal, the CA primarily held that no errors of law were apparent in the FTT decision. Although it recognised that a misunderstanding or misapplication of the law in some relevant particular or an ‘identifiable flaw’ in the treatment of the relevant question gives rise to a legal error, it classified the FTT’s findings as permitted evaluative conclusions.
In my view, the CA decision completely fails to address the misapplication and misunderstanding of the functionality test as outlined by the UT. In terms of Barclay Curle, the Disputed Items fulfilled the function of plant, and enabled performance of Urenco’s operations, and were thus more appropriately described as plant instead of premises. Both the FTT and the CA erred in examining a hypothetical trade which could never be carried out by Urenco in the absence of the regulatory functioning of the Disputed Items. The FTT’s approach to functionality, which assumed that a passive item was more like premises, was also wrong. Even if the Disputed Items were more passive, their main function enabled safe conduction of Urenco’s business in compliance with law.
Similarly, the distinction of Wangaratta was motivated by a disregard for the regulatory function of the Disputed Items. The ‘complex whole’ approach in Wangaratta, where every element, including the structure, was deemed essential for the efficient operation of the dyehouse, ought to have been applied in Urenco’s case.
The CA should have been guided by the UT’s reasoned decision in considering Urenco’s entitlement to capital allowances and its application of the functionality test to the unusual and atypical trade of nuclear waste processing in compliance with the specialised regulatory environment.
The decision also fails to demonstrate any errors of law in the UT’s independent reasoning without an evaluation of the FTT decision, and instead identifies the main issue as whether the UT exceeded its proper appellate role—contrary to the caution voiced by Lord Carnwath in Pendragon (UKSC).
Rohan Deshpande is an Unregistered Barrister, England & Wales, called by The Honourable Society of the Inner Temple, a Member of the Chartered Institute of Arbitrators, and an Indian-qualified Counsel specialising in tax and commercial dispute resolution.