SSE Generation – Taxpayer's capital allowances victory marred by procedural issue

In HMRC v SSE Generation Ltd [2021] EWCA Civ 105, the Court of Appeal (CA) upheld the Upper Tribunal's (UT) decision that expenditure on parts of a hydroelectric power scheme was eligible for capital allowances, save for one element in respect of which the taxpayer had failed to seek permission to appeal part of the First-tier Tribunal's (FTT) decision.

Background

SSE Generation Ltd (SSEG) claimed that various constituent parts of a hydroelectric power system built into the landscape (engineering works enabling the transfer of water through a turbine system to generate electricity and its subsequent discharge) were 'plant' and that the expenditure 'on the provision of plant' attracted capital allowances under Part 2, Capital Allowances Act 2001 (CAA).  It therefore claimed capital allowances in respect of £260 million of fixed asset expenditure in relation to the scheme.  HMRC accepted only £34 million of the claim, and denied the remainder. SSEG appealed.

Procedural rules relating to permission to appeal

A party that is unsuccessful before the FTT may seek permission to appeal to the UT – initially from the FTT (rule 39, FTT rules) and, if permission is not granted by the FTT, by renewing the application before the UT (rule 21, UT rules).  Permission may be sought from the UT only if the FTT has refused the application (or granted it only in part).  If permission is granted (either by the FTT or the UT), the appellant's notice of appeal is provided by the UT to the parties.  The respondent then provides a respondent's notice, stating (amongst other things) 'the grounds on which the respondent relies, including (in the case of an appeal against the decision of another tribunal) any grounds on which the respondent was unsuccessful in the proceedings which are the subject of the appeal, but intends to rely in the appeal' (rule 24(3)(f), UT rules).  

FTT decision

The FTT decided that the expenditure incurred by SSEG on the majority, but not all, of the relevant items was allowable. In particular, it held that some expenditure in relation to cut-and-cover conduits attracted capital allowances, and some did not.  

HMRC sought permission to appeal to the UT against all the matters in respect of which it had lost, but SSEG did not seek permission to appeal in respect of the expenditure which the FTT had found did not attract capital allowances. Permission to appeal to the UT was granted to HMRC and SSEG simply responded to HMRC's appeal.

UT decision

The appeal was dismissed. 

The UT was of the view that although SSEG had not sought permission to appeal in relation to the cut-and-cover conduits, since SSEG's arguments had been raised before the FTT, it was open to SSEG to argue the point again in the UT, provided that it gave notice of its intention to do so in its respondent's notice, and it did not need to apply for permission to appeal.  The UT therefore allowed all the claims to capital allowances. HMRC appealed to the CA.

CA judgment 

On the substantive question of whether the items in question were eligible for capital allowances, the CA agreed with the UT.  While 'tunnels' and 'aqueducts' fell within the list of items ineligible for capital allowances (at Item 1, List B, section 22, CAA), the CA concluded  that, in light of the other items listed in Item 1 being transport-related, the ability to claim capital allowances in respect of these items was restricted only where tunnels or aqueducts were to be used for transportation.  On this basis, capital allowances would, in theory, be available in full in respect of the cut-and-cover conduits.  

However, the CA's decision on the procedural issue prevented theory from translating into practice.  The CA acknowledged that a party that had lost only in relation to a minor issue might not wish to go to the trouble of preparing a notice of appeal if it was not sure whether its unsuccessful opponent was going to appeal the more substantive elements of the decision.  Nevertheless, in the view of the CA, neither this practical consideration nor the 'venerable principle' that the FTT's role was to determine the correct amount of tax payable, could override the statutory requirement that a party wishing to appeal on a point of law should seek permission in relation to it under rule 24 of the UT rules.  The statutory rules set out for the tax tribunals differ from the Civil Procedure Rules (CPR) regime (under which a respondent can serve a respondent's notice in which it seeks permission to appeal from the appeal court, as well as asking the appeal court to uphold the decision of the lower court for reasons different from, or additional to, those given by the lower court).

Comment 

This decision, although ostensibly concerning the application of the capital allowances regime to certain civil engineering works, raises an important procedural point for largely-successful litigants faced with an appeal from the FTT to the UT.  

The CA explicitly acknowledged that the effect of its interpretation of the UT rules is that a respondent that wishes to reverse a minor point decided against it in the FTT (which it otherwise would not have gone to the effort of appealing given its success in relation to the majority of its case) must seek permission to appeal from the FTT and, if necessary, request an extension of time for so doing.  

An objective set out expressly in the rules of both the FTT and the UT is 'avoiding unnecessary formality and seeking flexibility in the proceedings' and the tax tribunals are required to seek to give effect to this objective in interpreting their own rules and practice directions. The CA's decision, although logical, appears to be at variance with this objective, and it does mean that taxpayers whose appeals to the FTT have been largely successful and who are faced with an appeal by HMRC from the FTT will need to give careful consideration as to whether they need to seek permission to appeal in relation to any issue in respect of which they were unsuccessful. It would appear that even the purposive construction, required by the UT rules, cannot excuse compliance with a clearly-stated requirement to seek permission.  

Perhaps a more sensible approach, both for litigants and for an overburdened FTT, would be for the UT rules to be aligned with the CPR and for a largely-successful party faced with an appeal to be able to seek permission in its respondent's notice if it wishes to appeal minor aspects of the decision that it would otherwise have let lie.  

Finally, a cynical observer might raise an eyebrow at the irony of the CA's decision in the context of a case in which successive tribunals had strained to ensure that the taxpayer could access capital allowances where the strict reading of the legislation proposed by HMRC would have denied them such relief.  

The judgment can be viewed here.