Has your client recently refurbished their premises?

Overview

The outcome of the latest Wetherspoon’s case shows the following items are allowable/disallowable.

Allowable

  • Strengthening the kitchen floor
  • Toilet cubicle partitions (in part)
  • Alteration to the floor for better drainage of spillages
  • Food hoist shuttering

Disallowable

  • Tiling and plastering around a cooker and food hoist
  • Doors to isolate the kitchen
  • Construction of toilet blocks (in part)
  • Panelling, balustrades, cornices and architraves

Please see below for an in-depth analysis.

Background

In the continuing saga of J D Wetherspoon v RCC , the Upper Tribunal (“UT”) have dismissed in principle, appeals made in respect of two earlier decisions involving the disallowance by HMRC of claims for capital allowances (CA’s) for expenditure on fitting out and refurbishing public houses.

Neither J D Wetherspoon (“JDW”) nor HMRC were content with earlier decisions hence the appeal by JDW and cross appeal by HMRC. Consistent with the approach taken in earlier hearings, the points in dispute were limited to one particular pub used as a test case which not unlike many other pubs in the chain had been converted from an existing building. Expenditure included the provision of a new toilet area, an entire new floor incorporating a bar and new kitchen area.

Issues subject to appeal

The case provided some useful commentary on relevant case law and legislation in particular the meaning of s66 CAA 1990 (incidental expenditure) which has now been written almost word for word within s25 CAA 2001. The matters under dispute were categorised under three headings:

  1. Plant or premises (previously s24 CAA 1990 – this has now been replaced by several clauses within Part 2 CAA 2001) – JDW believed that decorative items including panelling, cornices and architraves and metal balustrade ends, had been categorised incorrectly; 

  2. Incidental expenditure (previously s66 CAA 1990, now s25 CAA 2001) – A broader understanding of s66 and how it applied to certain expenditure was sought by JDW. HMRC believed earlier decisions in favour of JDW had been too generous. 

  3. Apportionment of preliminaries – HMRC thought that the pro-rata apportionment of specific trade related overhead expenditure was incorrect.

Decisions

1. Plant or premises

The overriding issue was whether the items of expenditure formed part of the premises from which the trade was undertaken and therefore ineligible for capital allowances or whether they retained a separate identity as allowable plant.

In relation to the panelling, Council for JDW did not accept the reasoning for earlier rejections that such expenditure was an embellishment enhancing the atmosphere of the premises an argument used successfully in the Scottish & Newcastle and Wimpey International cases. The UT rejected such arguments. Introducing a new factor to those expressed by Hoffmann J in the Wimpey case, the view of the UT was that such an item would be regarded as an unexceptional component (not an unusual feature of this type of premises) and therefore was part of the premises.

In relation to other items, having seen photographs of the various items in issue, the UT did not agree with the argument that such items including balustrades, cornices and architraves were removable and separate from the premises.

2. Incidental expenditure

s 25 CAA 2001 (previously s 66 CAA 1990) covers relief for expenditure incurred on alterations to an existing building incidental to the installation of machinery and plant for the purposes of the trade. JDW and HMRC had differing views on what this section covered.

JDW took the view that it included all such expenditure installed to make the plant more useable. For example, walls and separate cubicles were needed to facilitate the use of toilet sanitary ware. Conversely, HMRC contended that only expenditure incidental to the physical installation of the plant, not covered by s24 CAA 2009, was covered.

The UT expressed the view that only expenditure that was truly incidental to the installation of plant should be allowed. While some expenditure would contribute to the better use of the asset, it may also serve wider purposes which were not incidental to the installation of plant. Taking the example of the construction of toilet blocks, the UT did not accept that the building alterations including partitions, cubicle doors and tiling, were incidental to the installation of sanitary ware.

In summary, only one cross appeal raised by HMRC was allowed. All appeals raised by JDW were dismissed. A summary of the decisions is as follows:

Item of expenditure and UT decision

Kitchen tiling and door– The claim that the installation of the cooker led to the need for tiling and plastering and the installation of doors to isolate the kitchen was in the view of the UT rightly rejected by earlier courts.

Strengthening the kitchen floor– The UT did not disturb the earlier decision to allow relief.

Toilet cubicle partitions & other alterations – HMRC’s cross appeal was allowed in respect of block work partitions. As no cross appeal was made by HMRC in respect of non-block partitions, the FTT decision was not disturbed although the UT did not feel this was the right decision.  No allowances were due for the construction of toilet blocks. Relief was only available under s24 for plant and costs of installing that plant.

Cold-store floor and drainage system – The UT agreed alterations to the floor to allow better drainage of spillages was allowed. 

The food- hoist shuttering– HMRC had accepted that the shuttering was eligible for allowances. JDW’s appeal that the tiling on the shuttering was however dismissed as this was merely finishing.                                                                                                                          

3. Apportionment of preliminaries

Preliminaries are by their nature, items of overhead expenditure which cannot be attributed to any single item in the building project. The issue was over preliminaries which were trade specific and attributed to particular types of building activity. Earlier decisions had ac
cepted the view expressed by JDW that capital allowances for such expenditure should be given on a pro-rata basis on all allowable and non-allowable costs. HMRC, maintained the view that such trade specific expenditure should be analysed however time-consuming or uneconomic that process may be.

The UT agreed that analysing item by item would be disproportionately time consuming or expensive and that common sense dictated a pro-rata approach. Accordingly, HMRC’s cross appeal was dismissed. 

Summary

The UT decision demonstrates how difficult it can be to secure capital allowances on property refurbishment expenditure, especially where costs can be argued to be part of the premises or setting in which the trade is carried on. What this decision and others before it have provided is a list of items which may be treated as plant in buildings as those described in this case. The UT also provides a clearer view on the criteria which has to be met in relation to incidental expenditure incurred to install plant and the meaning of what is now s25 CAA 2001 (prev s66). Practitioners with similar capital allowance claims should review this case and apply it to their own situations accordingly. 

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    Good post. I will be dealing with some of thesse issues as well..