Revenue and Customs Commissioners v SSE Generation Ltd

The Court of Appeal considered whether expenditure incurred by SSE Generation Ltd on components of the Glendoe hydro-electric scheme qualified for capital allowances under the Capital Allowances Act 2001. Key statutory provisions were section 11 (general rule), section 21 (buildings), section 22 (structures, assets and works) and section 23 (savings for List C items), together with List B (excluded structures) and List C (savings such as Item 22 and Item 25).

The court upheld the Upper Tribunal's core conclusions that the two limbs of section 22(1) are mutually exclusive (so that if an item is a structure for the purposes of section 22(1)(a) one does not then apply section 22(1)(b)), and that the relevant List B words must be construed in their statutory context. Applying that approach it rejected HMRC's broad reading of 'tunnel' and 'aqueduct' in List B Item 1 and agreed that the disputed conduits, headrace and tailrace are structures (industrial buildings) rather than List B tunnels or List B aqueducts, so they are not disqualified by section 22(1)(b) and are in principle eligible for capital allowances unless another provision applies.

The court also addressed List C and the meaning of 'installing' in List C Item 22, and the procedural question whether SSE could rely on a point it had lost before the First-tier Tribunal without obtaining permission to appeal; the appeal was allowed in part on that procedural point in relation to the 'cut and cover' conduits.

Background and parties: SSE Generation Ltd constructed the Glendoe hydro-electric power scheme. HM Revenue & Customs issued closure notices for the years 2006–2012 denying some claimed capital allowances and SSE appealed. The First-tier Tribunal (FTT) allowed some claims and disallowed others; HMRC appealed to the Upper Tribunal (UT) and the UT largely remade the decision in SSE's favour. HMRC obtained permission to appeal from the UT to the Court of Appeal.

Nature of the claim and relief sought: The dispute concerned whether elements of the scheme (drill and blast conduits, cut-and-cover conduits, open channels, the headrace and the tailrace) constituted expenditure on plant qualifying for capital allowances under the Capital Allowances Act 2001, or whether they were excluded by section 22 as structures or as works involving alteration of land.

• Issues framed by the court included: (i) the relationship between section 22(1)(a) and 22(1)(b) (are they mutually exclusive or overlapping), (ii) the meaning of the words 'tunnel' and 'aqueduct' in List B Item 1, (iii) whether particular components of the scheme fell within List B or were saved by List C (notably Items 22 and 25), (iv) the proper meaning of 'installing' in List C Item 22, and (v) procedural limits on a respondent’s ability to run points it lost before the FTT without permission to appeal.

Reasoning and subsidiary findings: The court held that section 22(1)(a) and (b) are alternatives and do not overlap; if an item is a structure caught by section 22(1)(a) then one does not subsequently disqualify it by reference to section 22(1)(b). The court endorsed a contextual construction of List B: 'tunnel' bears a narrower meaning in that context (primarily a passage intended for people or transport) and 'aqueduct' is confined to a transport/canal-like bridge structure in that List B context. Applying those constructions, the conduits, headrace and tailrace were not List B tunnels or aqueducts and, as industrial buildings, fell outside the sweep of List B Item 7; consequently section 22(1)(b) did not apply to them. The UT’s narrower approach to List C Item 22 (so that 'installing' normally means placing pre-manufactured items rather than creating plant in situ) was considered persuasive although the Court of Appeal recognised the difficulty of defining those elastic words in the abstract. On procedure, the court held that a respondent who lost on a point before the FTT cannot treat the Upper Tribunal respondent’s notice as a substitute for seeking permission to appeal; permission processes under the Tribunals, Courts and Enforcement Act 2007 and tribunal rules must be respected.

Result: The Court of Appeal dismissed HMRC's appeal except that it allowed HMRC's challenge to the UT's conclusion that all expenditure on the 'cut and cover' conduits was allowable, on the ground that SSE had not sought permission to appeal that earlier FTT ruling.

This was an appellate decision. The Court of Appeal allowed HMRC's appeal in part and dismissed it in part. The court held that (1) section 22(1)(a) and 22(1)(b) are mutually exclusive in operation so that if an item is a structure falling to be considered under section 22(1)(a) one does not then re-apply section 22(1)(b); (2) the words in List B must be read in context so that 'tunnel' in List B Item 1 bears a transportation-oriented meaning and 'aqueduct' is confined in that context to canal-carrying/bridge-like structures; (3) applying those constructions the conduits, headrace and tailrace are structures (industrial buildings) and not List B tunnels/aqueducts and so are not disqualified by section 22(1)(b), making the expenditure in principle allowable subject to any other provision; but (4) the Upper Tribunal erred in permitting SSE, by way of a respondent's notice, to obtain a fuller allowance for the 'cut and cover' conduits without SSE first obtaining permission to appeal against the FTT’s ruling on that discrete point. For those reasons the appeal was allowed in part.

FTT decision: SSE v HMRC decided by Judge Kevin Poole ([2018] UKFTT 416 (TC)). HMRC appealed to the Upper Tribunal (Tax and Chancery Chamber) where Judges Herrington and Brannan largely remade the decision in SSE's favour ([2019] UKUT 332 (TCC)). The Upper Tribunal granted permission to appeal to the Court of Appeal on 23 December 2019. The Court of Appeal delivered its judgment on 1 February 2021 ([2021] EWCA Civ 105).