Out-Law News 4 min. read

‘Tunnel’ tax ruling has implications for infrastructure projects

A recent ruling by the UK Supreme Court provides guidance to businesses engaged in major infrastructure projects on their eligibility for tax reliefs, experts have said.

Sam Wardleworth and Jake Landman of Pinsent Masons were commenting after the court decided, completely in favour of the taxpayer, that a series of structures within the Fort Augustus Hydro-electric power station at Glendoe in Scotland were not “aqueducts” or “tunnels”. The effect of that decision (18-page / 605KB PDF) is to allow SSE Generation Limited (SSE), the subsidiary within the SSE group that constructed the power station, capital allowances deductions for the expenditure on those structures.

Wardleworth and Landman said that while the ruling might appear to be on an extremely narrow point of statutory interpretation, it has much wider relevance to the application of capital allowances to infrastructure projects and the correct approach to interpreting groups of items in statute.

Unlike many other capital allowances cases, there was no question in this case that the expenditure had been incurred for the purposes of the trade and no question that the structures were “plant”. However, certain types of structure are excluded from the scope of the capital allowances regime. The question hinged on the interpretation of the first group in the list of excluded structures within the legislation, known as “List B”.

This group of excluded structures was listed as: “a tunnel, bridge, viaduct, aqueduct, embankment or cutting”.

Both tax tribunals and the Court of Appeal had found that none of the structures within the Fort Augustus Hydro-electric power station fell within the scope of a “tunnel”. The First-tier Tribunal had found that some of the structures were aqueducts, but this was overturned by the Upper Tribunal with whom the Court of Appeal agreed. Therefore, HM Revenue & Customs (HMRC) had only had partial success at first instance, but the taxpayer had been successful on each stage of appeal. 

HMRC sought to argue for the widest ordinary meaning of each of the words, i.e. that ‘tunnel’ meant an underground passage and that ‘aqueduct’ meant any conduit to convey water. They also argued that any thematic connections in the relevant parts of the legislation did not justify narrowing a meaning. HMRC also said their approach was consistent with the agreed mischief of the legislation namely to draw ‘a line in the sand’ based on the existing case law as to where the boundary lay for qualifying expenditure.

The Supreme Court found that where there are two possible ordinary meanings of a word or phrase in statute, it is necessary to find a way to decide which is intended by the legislation. Lord Hamblen, with whom the other Supreme Court judges sitting in this case agreed, said: “There is nothing wrong in principle in relying upon a thematic connection which explains the grouping of items in a list. That is an important part of the statutory context.”

Applying this principle, the Supreme Court noted the drafting technique in grouping of items. The court then identified that the thematic connection between the items in the first group in List B was of “structures related to the construction of transportation routes or ways”. Therefore, a narrower meaning of tunnel was required. It means, the court said, “a subterranean passage through an obstacle for a way (such as a railway, road or canal) to pass through”. For SSE, this meant that the various conduits they had constructed as part of their power station were not tunnels, since they did not provide a passageway.

On aqueducts, the Supreme Court found that, in the context of the first group in List B, an aqueduct meant a bridge-like structure for carrying water, which includes the carrying of canals but is not limited to it. The Supreme Court recognised that ‘aqueduct’ was more difficult to define in this context because the name already requires that it must be transporting water. However, the court did not find that the general transportation theme to the list required that it was limited to canal-carrying aqueducts.

Sam Wardleworth said: “Although not strictly necessary, the Supreme Court also provided its views on the meaning of bridge, viaduct, cutting and embankment, and an indication of the thematic connections for other lists of items in List B. This will be helpful to a much wider group of businesses undertaking construction of many types, including transport infrastructure.”

The Supreme Court criticised HMRC’s approach to statutory interpretation. It found that HMRC’s arguments relied on one of two assumptions: either that HMRC’s preferred meaning of an ordinary word was the right one or that, where there are two possible meanings, the wider meaning is to be adopted. The court found that neither of these assumptions was justified. Instead, the Supreme Court considered that there is no inherent assumption that a wider meaning should be adopted and that neither the statutory context, nor the mischief being addressed by List B, justified such an interpretation.

In the event that the Supreme Court had found potential exclusion from relief under List B, the taxpayer had an alternative argument which sought to rely on a carve out from the exclusion, contained in List C. The Supreme Court stated it did not need to decide this in light of the conclusions on List B.

Jake Landman said: “This case is another example of a recent trend of HMRC attempting to take a point on the meaning of the legislation in order to deny relief where there is no tax avoidance at play and the taxpayer has applied an ordinary, rather than strained, approach to the words used. Indeed, arguably it was HMRC taking an unconventional approach to interpretation, which has been rejected by the Supreme Court.”


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