Liverpool port capital allowances dispute to be reconsidered by tax tribunal

Mersey Docks Harbour Company (MDHC) constructed the quay wall as part of a new deep-water container terminal at the Port of Liverpool known as ‘Liverpool2’. MDHC argued that the construction costs had been incurred on the provision of plant and machinery.

Under UK tax law, a company that spends money on capital assets for use in its business may be able to claim a tax relief called a capital allowance– including on the provision of plant and machinery.

One of the ways in which expenditure is “qualifying” for capital allowances purposes, is if it is spent on “the provision of plant or machinery” wholly or partly for the purposes of the qualifying activity of the person incurring the expenditure. However, the position is complicated by the existence of both ‘List B’ exclusions to that general rule and ‘List C’ exceptions to those exclusions.

One exclusion applies to expenditure on “a dock, harbour, wharf, pier, marina or jetty or any other structure in or at which vessels may be kept, or merchandise or passengers may be shipped or unshipped”. However, when it first considered the MDHC case, the first-tier tax tribunal (FTT) determined that the company’s expenditure on the quay wall fell within a List C exception provided for certain kinds of machinery. This meant the expenditure should be treated as “on the provision of plant or machinery” and capital allowance relief available.

However, HM Revenue and Customs (HMRC) appealed against the FTT’s decision, which was considered by the upper tribunal (UT).

HMRC’s appeal was rooted in two broad issues. First, it argued that the FTT had made a decision that was not open to it when it decided that the quay wall constituted apparatus rather than premises, including by virtue of applying the wrong legal test. Second, it claimed the FTT had erred in law in concluding that the List C exception was engaged.

The UT held (35-page / 730KB PDF) that the FTT had chosen the right evaluative multi-factorial approach for determining how the quay wall should be classified but had made errors in the way it had undertaken that exercise.

First, according to the UT, the FTT misdirected itself when it made an analogy between the dry dock in another case, Barclay Curle, and the quay wall and its associated cranes as a “composite asset”. The FTT should have been considering the functions of the quay wall by itself, the UT concluded.

Second, the UT considered that the FTT failed to conduct a multi-factorial analysis of the functions of the quay wall and that therefore its reasoning as to why the quay wall was plant and not premises was flawed.

Third, the UT determined that the FTT failed to give adequate reasoning in deciding between various elements of its multi-factorial assessment of the primary purpose of the quay wall, including failing to explain why the evidence of one expert over the other was preferred. This led the UT to say that the reasoning on the predominant purpose of the quay wall was not clear.

On the question of whether the quay wall fell within the List C ‘machinery’ exception, the UT found further problems.

First, the UT said, the FTT erred in applying a “test of necessity” when it found that the expenditure on the quay wall was necessary in order for the cranes to be installed. Although the FTT referred to the fact that a test of necessity was not required by the case law, they appeared to have applied one in their reasoning, the UT said.

Second, the UT reflected on the fact that the FTT had issued its decision prior to the UK Supreme Court setting a narrow test for determining when expenditure can constitute expenditure “on” the provision of plant or machinery in a separate case involving Orsted. That test requires a close connection between the expenditure and the plant provided. The UT considered, in this context, that the FTT had applied the wrong test to its assessment – even though the relevant Supreme Court judgment had not been reached at the time of the FTT decision.

Because there had been errors of law, the UT said the FTT’s decision would need to be set aside. However, it said it was not in a position itself to remake the decision, so it remitted the case to the FTT for a “reconsideration” by a new panel. This will not involve a full rehearing, as findings of fact from the original decision will stand other than certain specified items.

Tax law expert Jake Landman of Pinsent Masons said: “Whilst the UT did choose to comment that there appeared to be no good reason for the FTT delay in releasing the original decision, the UT was not satisfied that this materially contributed to any errors in the decision or that HMRC was right in saying that the delay was such that the decision could not stand.”

“The fact that the case has now been remitted for reconsideration by a different FTT means that there will be further delay and a need to revisit certain factual material even longer after the original FTT hearing, which seems less than ideal,” he added.

Tax law expert Andrew McCarthy of Pinsent Masons added: “The capital allowances treatment of large infrastructure projects and their various components has always been complex but in a time of comparatively high interest rates impacting the viability of projects it will be increasingly important to obtain early and substantive capital allowances advice.”