April 4
The taxpayer property fund converted a former flight training centre it owned near London Luton Airport into a hotel. It claimed a capital allowance known as business premises renovation allowance (“BPRA”) of £12,478,201 in its tax return for 2010–2011 as capital expenditure “on, or in connection with” the conversion works within the meaning of section 360B(1)(a) of the Capital Allowances Act 2001. There was no dispute that the property was a qualifying building which became “qualifying business premises” within the meaning of section 360D(1) of the Act due to the conversion and that the LLP had incurred the expenditure prior to the expiry date as defined by section 360B(2) of the Act. The revenue disallowed £5,255,761 of the claim with the result that it was reduced to £7,222,439. The taxpayer appealed to the First-tier Tribunal, asserting (i) its entitlement to the full amount claimed as a reflection of expenditure it had incurred under an agreement it entered into with a developer for the conversion works and (ii) in the alternative, that it was necessary to consider constituent elements of the development sum. The First-tier Tribunal held that the entire amount did not qualify for BPRA and disallowed several development sum costs. On the taxpayer’s further appeal, the Upper Tribunal affirmed the decision that the entire amount did not qualify for BPRA but reversed the First-tier Tribunal’s disallowance of five development sums. The taxpayer appealed against the Upper Tribunal’s decision on the first issue on the basis that both tribunals wrongly focused on how the developer was to spend the development sum rather than the fact that the taxpayer had incurred the expenditure. The revenue appealed against the Upper Tribunal’s allowance of the particular development sums as qualifying expenditure.
On the appeals—
Held, taxpayer’s appeal dismissed; revenue’s appeal allowed in part. It was necessary to construe the relevant legislation in order to determine the nature of the transaction to which the legislation was intended to apply. Physical works were at the heart of the tax relief available under section 360B(1) of the Capital Allowances Act 2001. That provision operated when a qualifying building through conversion or renovation became a “qualifying business premises” within the meaning of section 360D(1) of the Act. The purpose of the measure was to be taken from the legislative scheme, read as a whole. The legislation did not require the premises actually to be used. Allowances could be obtained and retained provided that the work was done and the premises became available for letting even if never actually used. The purpose was therefore to encourage the conversion or renovation of disused properties to make them available for business use. The words “on, or in connection with” within the meaning of section 360B(1)(a) of the Act had to be construed relatively narrowly. The connection had to be by inference be with the particular works of conversion, renovation or repair which led to the building being at least, “available and suitable for letting” within the meaning of section 360D(1)(b) of the Act, and it was not necessary for the premises to be used. The scope of expenditure capable of qualifying for allowances could not differ according to whether it resulted in premises that were actually in use, as opposed to being available and suitable for use. Whether particular expenditure met that requirement was to be assessed realistically. The Upper Tribunal had erred in applying a broad construction to section 360B(1) and concluding that the target of the measure was a functioning building which was open for business. On the first issue, the Upper Tribunal had correctly concluded that the entire amount did not qualify for BPRA. On the five disputed development sums, the Upper Tribunal erred in its assessment on three of them. One of those matters was to be remitted to the First-tier Tribunal for reassessment if not otherwise agreed (paras 70–74, 76–80, 97, 106, 137, 150, 160, 173, 174, 175, 176).
Malcolm Gammie KC and Jonathan Bremner KC (instructed by DWF Law LLP) for the taxpayer.
Jonathan Davey KC, John Brinsmead-Stockham KC, Nicholas Macklam and Sam Chandler (instructed by Solicitor, Revenue and Customs) for the revenue.