Expenditure incurred on the construction of a nuclear deconversion facility did not qualify for capital allowances

In Urenco Chemplants Ltd and another v HMRC [2022] EWCA Civ 1587, the Court of Appeal (CoA) overturned the Upper Tribunal's (UT) decision to set aside the First-tier Tribunal’s (FTT) decision that expenditure incurred on the construction of a nuclear deconversion facility did not qualify for capital allowances.

Background

Urenco Chemplants Ltd and Urenco UK Ltd (together, Urenco) form part of a corporate group that provides  enriched uranium to the civil nuclear industry. 

The case concerns the availability of capital allowances for expenditure incurred by Urenco on the construction of a specialised facility for the treatment and management of highly toxic and radioactive waste in the civil nuclear industry, known as 'Tails', by a process known as 'deconversion'. The deconversion process essentially involves removing the fluorine content of the Tails so that they can be stored more easily. The facility in question is in Cheshire, and is known as a 'Tails Management Facility' (TMF). 

Construction of the TMF was largely completed in 2018, at a cost of approximately £1 billion. The treatment for capital allowance purposes of most of this expenditure was agreed between Urenco and HMRC, but there was a dispute in relation to claims for allowances in respect of approximately £192 million. 

Urenco appealed to the FTT against two discovery determinations and four closure notices, covering accounting periods ended 31 December 2011 to 31 December 2015, inclusive. 

FTT decision

The appeal was dismissed.

The FTT held that Urenco was not entitled to capital allowances for any of the disputed expenditure, because: 

(a) most of it was not incurred “on the provision of plant or machinery” within the meaning of section 11, Capital Allowances Act 2001 (CAA); and 

(b) the whole of the expenditure was, in any event, excluded from allowances by section 21, CAA, as it was expenditure “on the provision of a building”. 

The FTT also considered whether any of the expenditure was saved from the effect of section 21 by the exceptions, or “carve outs”, contained in List C set out in section 23, CAA. 

The FTT concluded that none of the exceptions upon which Urenco sought to rely were applicable. 

Urenco appealed to the UT. 

UT decision

The appeal was allowed.

Notwithstanding the fact that Urenco did not challenge any of the FTT’s findings of fact, nor did Urenco or HMRC contend that the FTT had misunderstood the legal principles which govern the question of what constitutes “plant” for the purposes of CAA, the UT identified what it considered to be material errors of law in the FTT’s treatment of the issues relating to the “provision of plant” and the “provision of a building”, under sections 11 and 21, CAA. 

The UT therefore set aside the FTT decision and remitted the case to the FTT to remake the relevant decisions on those two issues. 

The UT dismissed Urenco’s appeal on the potential applicability of items contained in List C. 

HMRC appealed and Urenco cross-appealed, to the CoA.

CoA's judgment

HMRC's appeal was allowed.

Urenco's cross-appeal in relation to the proper statutory construction of List C was also allowed.

In allowing HMRC's appeal, the CoA concluded that the UT was wrong in law for the following reasons: 

1.  With regard to the FTT's conclusion that most of the disputed assets did not, in principle, constitute "plant" for the purposes of section 11, CAA, the FTT had not erred in law and the UT was mistaken to find otherwise. The FTT had reached an evaluative conclusion which it was entitled to do.

2.  The UT had erred in law in concluding that the part of the disputed expenditure attributable to the walls and first-floor slab of the vaporisation facility was "on the provision of" plant or machinery. It was noted that it would be paradoxical if the walls and floor slab, which clearly formed part of the setting within which the items of equipment in the vaporisation facility operated, were to qualify as plant merely because steel supports for some of those items are fastened to them. The natural conclusion was that this feature of the vaporisation facility reflected its role as a specialised setting for the operations carried out within it.

3.  The UT had erred in law in setting aside the FTT’s decision that the disputed expenditure was "on the provision of a building". The FTT had made no material errors of law and had come to conclusions that it was fully entitled to reach. The UT had over-complicated this part of the case. The errors of law it identified were no more than the FTT’s evaluative conclusions of fact and degree.

Urenco appealed on two grounds. The first ground related to the proper statutory construction of items 1 and 4 of List C. It contended that, properly construed, they applied to expenditure “on the provision of” those items, and not merely to expenditure “on” them, as held by the UT. Urenco was successful on this ground and the CoA remitted this point to the FTT to reconsider.

Urenco's second ground related to item 22 in List C, which provides a carve-out for expenditure on “[t]he alteration of land for the purpose only of installing plant or machinery”. Urenco contended that the UT wrongly held that item 22 did not apply to the disputed assets on the facts found by the FTT. In the view of the CoA, the UT had not made an error of law in concluding that item 22 of List C (the alteration of land for the purpose only of installing plant or machinery) did not apply to the disputed assets on the facts found by the FTT and this ground of appeal was dismissed. 

Comment 

This case provides a useful discussion by the CoA on the difference between premises and plant, notwithstanding that the availability of plant and machinery capital allowances is very much dependant on the particular facts in any given case. It also provides helpful confirmation that expenditure "on the provision of" any item in List C is to be treated as expenditure "on" that item, in order to rectify a drafting error within the legislation.

The judgment can be viewed here.