London Luton Hotel BPRA Property Fund LLP v The Commissioners for HMRC

For capital allowances under Part 3A of the Capital Allowances Act 2001, expenditure incurred “in connection with” conversion, renovation or repair requires a relatively narrow, strong and close nexus with physical works that make premises available and suitable for business use. The enquiry is purposive and realistic. The court must construe the legislation first, then assess the whole transaction, including its economic substance and related contractual arrangements. Expenditure supporting borrowing, marketing a tax-advantaged investment scheme, paying for a hotel brand or removing a proposed operator was too remote. A residual amount in a bundled development package could not automatically qualify where the package included land acquisition and other non-qualifying elements.

The LLP claimed business premises renovation allowance for expenditure incurred in converting a former flight training centre into a hotel. The First-tier Tribunal’s decision was reported at [2019] UKFTT 212 (TC). The Upper Tribunal partly reversed that decision in [2021] UKUT 147 (TCC) and allowed the LLP’s claim apart from certain legal fees and the interest amount.

The LLP and HMRC brought cross-appeals. The central issues were the meaning of “on, or in connection with” conversion under Part 3A of the Capital Allowances Act 2001, whether particular funding, marketing, franchise and support payments qualified, and how a residual amount in the overall development package should be treated.

The leading judgment was given by Lady Justice Whipple and Lady Justice Falk, with Lord Justice Lewison agreeing.

1. Statutory approach. The court applied the two-stage approach in Barclays Mercantile Business Finance Ltd v Mawson [2004] UKHL 51: construe the legislation purposively, then decide whether the actual transaction, viewed realistically, answers the statutory description. In the context of section 360B(1) of the Capital Allowances Act 2001, “in connection with” has a relatively narrow meaning. It requires a strong and close nexus with physical conversion, renovation or repair works. The focus is not a functioning business being open for trade. Availability and suitability for business use are sufficient.
2. Realistic appraisal and funding arrangements. The court had to consider the whole factual matrix, including the Intercreditor Deed, the destination of funds, contractual protections, valuation and the real purpose of expenditure. The Capital Amount was a support package for the Co-operative Bank loan, not expenditure on or in connection with the conversion. The Interest Amount was circular and substantially self-cancelling, lacked real commercial purpose and was too remote from the physical works.
3. Fees and franchise payments. Promoter and IFA fees were costs of marketing the tax-advantaged investment structure and were too remote to qualify. The Sanguine payment related to removing a proposed hotel manager and operator. The Ramada payment was for intellectual property rights enabling the operating company to use a hotel brand. Neither payment had the required nexus with the conversion works.
4. Residual amount. The LLP paid for a broader development package, including securing the freehold and other non-qualifying elements. The residual difference between the total expenditure and identified costs could not all be treated as qualifying expenditure. A fee attributable to procuring the freehold fell within the land-acquisition exclusion in section 360B(3)(a). The proper apportionment was remitted to the FTT.

HMRC’s appeal was allowed on Issues 2(a), 2(c), 2(d) and 2(e). The LLP’s appeal was dismissed on Issues 1 and 2(b).

• Court of Appeal (Civil Division): Cross-appeals allowed and dismissed in part as stated above. The apportionment of the residual amount was remitted to the First-tier Tribunal if not agreed.
• Upper Tribunal (Tax and Chancery Chamber): In [2021] UKUT 147 (TCC), the tribunal partly reversed the First-tier Tribunal and allowed the LLP’s claim except for the interest amount and certain legal fees. The Court of Appeal set aside the relevant conclusions.
• First-tier Tribunal: The decision in [2019] UKFTT 212 (TC) disallowed part of the BPRA claim and determined the treatment of the disputed expenditure.