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You are here: BAILII >> Databases >> First-tier Tribunal (Tax) >> Cheshire Cavity Storage 1 Ltd and EDF Energy (Gas Storage Hole House) Ltd v Revenue & Customs (PROCEDURE : Other) [2019] UKFTT 498 (TC) (01 August 2019) URL: https://www.bailii.org/uk/cases/UKFTT/TC/2019/TC07301.html Cite as: [2019] UKFTT 498 (TC) |
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[2019] UKFTT 498 (TC)
CAPITAL ALLOWANCES - gas cavities
– whether plant – no – whether excluded from allowances under s 22 CAA -yes
FIRST-TIER TRIBUNAL TAX CHAMBER |
|
TC07301
Appeal number: TC/2017/01148 and TC/2017/01153 |
BETWEEN
|
-and- EDF ENERGY (GAS STORAGE HOLE HOUSE) LIMITED |
Appellants |
-and-
|
THE COMMISSIONERS FOR HER MAJESTY’S REVENUE AND CUSTOMS |
Respondents |
TRIBUNAL: |
JUDGE BARBARA MOSEDALE
|
Sitting in public at Taylor House, Rosebery Avenue, London on 19-22 November 2019
Mr J Peacock, QC, instructed by Enyo Law LLP, for the Appellant
Ms A Nathan, counsel, instructed by the General Counsel and Solicitor to HM Revenue and Customs, for the Respondents
DECISION
Introduction
1.
This appeal concerns the tax treatment of expenses incurred in creating
gas cavities.
Cheshire
Cavity
Storage 1 Limited was the first appellant and I
will refer to it as CCS. The second appellant was EDF Energy (Gas Storage Hole
House) Limited which I shall refer to as EDF. I will refer to the two
appellants collectively as ‘the appellants’.
2. CCS appealed against conclusions in 3 closure notices dated 3 August 2016 which amended its tax returns for the periods ended 31 December 2011 to 31 December 2013. EDF appealed against closure notices also issued on 3 August 2016 which amended its tax returns for the accounting periods ended 31 December 2006 to 31 December 2013.
3.
The effect of the closure notices was to deny both companies capital
allowances in respect of the cost of de-brining gas cavities,
and to deny EDF
capital allowances in respect of the cost of leaching gas
cavities.
4. I am asked only to make a decision in principle on whether the appellants were entitled to capital allowances on these costs; the parties have largely agreed the amount of tax at stake.
the facts
agreed facts
5. The parties agreed a statement of facts. I mention in passing that there were two sentences in it that were not agreed, but neither party suggested to me that there was anything significant to the appeal in their failure to agree that part of the statement and I cannot see that the disagreement was significant, and in the absence of either relevance or submissions, I do not resolve it.
6. The agreed facts were that both appellants were companies in the EDF Energy PLC corporate group, by which company they are, indirectly, 100% owned. The business of the group is energy generation and distribution in the UK. The group supplies gas to customers over the National Transmission System (‘NTS’) owned by National Grid. As part of its business, the group has cause to store gas.
7.
The business of CCS and EDF is the development, construction and operation
of gas storage facilities in the UK. The two companies operate gas storage
facilities on adjoining sites in Cheshire.
Between them, the two sites
represent 7% of the UK’s gas storage capacity and can hold up to 20% of the
UK’s daily delivery capacity.
8.
The site operated by CCS (Hill Top Farm) under a lease comprised, when
the site was acquired in 2009, 10 underground cavities
filled with brine. In
2014, CCS de-brined three of these
cavities,
and, at the time of the hearing,
was in the process of de-brining two more, to make them suitable for gas
storage, at a cost of approximately £40million. The site operated by EDF (Hole
House) contained one underground
cavity
for gas storage when the lease over it
was acquired in 2002; in 2002-6, EDF created three further gas
cavities
by a
process of leaching and de-brining at a cost of approximately £j million.
9.
While not a part of the agreed facts, although it seemed agreed by the
parties, I find that, in order to use the cavities,
CCS and EDF incurred
expenditure on boreholes, pipework, pumping and dehydration equipment, and on
control mechanisms. All this expenditure has been accepted by HMRC as
qualifying for plant and machinery allowances. The dispute related solely to
the cost of leaching some and de-brining the eight
cavities.
Findings of disputed facts
Evidence of Mr Christopher Andrew Bebbington
10. Mr Bebbington was Chief Technical Officer of EDF Energy Plc, and his role involved oversight of the group’s engineering, supply chain and project development for coal, gas and renewables, including oversight of CCS and EDF. He gave evidence of fact.
11. He explained that EDF Energy PLC wanted to diversify into gas storage as the UK’s own production of gas declined and it became more dependant on imported gas; doing so would put EDF in a position to maintain a gas supply to customers in the event of interruptions in supply from abroad. It also would allow it to benefit from price increases in that it could store gas when cheap and sell it when expensive. It was his evidence that EDF’s business plan for the appellant companies was to profit from arbitrage on gas price volatility.
12. He also said, and Mr Dorsett agreed, that while the economics favoured investment in fast-cycle gas storage in around 2000 (due to supply and price volatility as explained above), by 2010 there was much less supply and price volatility in the market.
13. It was his evidence that the two appellants, although owning adjoining sites, to a large extent operated separately. Each site had its own above-surface plant. There were pipes which connected the two sites but it was rare from them to be used as the gas in each site would normally be at a different pressure. The companies did share some staff; in particular both sites were managed by the same people and shared a single team of engineers.
14. While he was not giving expert evidence, in his oral evidence his explanation of how the two sites operated was very similar to that of the experts. He appeared to be a reliable witness and I accepted his evidence.
Expert evidence
15. Mr David Aron was instructed by HMRC. He was accepted to be an independent expert. He was managing director of Petroleum Development Consultants Ltd; his background was as a petroleum and chemical engineer with some 40 years’ experience in the oil industry. He was a fellow of the UK Institution of Chemical Engineers and the UK Energy Institute. He was a member of the UK Institution of Gas Engineers and Managers, and a Founding Member of the European Section of the Society of Petroleum Evaluation Engineers, and a member of the Association of International Petroleum Negotiators.
16. The appellants did not challenge his status as an expert nor the relevance of his evidence but Mr Codara did make the point that Mr Aron had little direct experience of a gas storage business. When running his own company, Mr Aron had had experience of putting gas into a storage facility (the Rough offshore field), but his company was the customer of the gas storage facility and not a company whose business was gas storage.
17. Mr Codara was fairly critical of his evidence, suggesting to me that Mr Aron had guessed answers. I did not take that impression away. I found him to be a careful witness. I did conclude that Mr Aron’s understanding of what words meant was grounded in the technical or industry usage of the words and would not necessarily reflect the colloquial or general understanding of the word. This was apparent, for instance, from the disagreement between the experts on what was a pressure vessel and what was a pump.
18.
Mr David Graham Dorsett was instructed by the appellants. He was also
accepted to be an independent expert witness. He was a director of DGD Energy
Consultancy Ltd; his background was in mechanical engineering. He spent 10
years as a senior executive directly involved in the development, construction
and operation of the Holford gas storage facility, which stored gas in gas
cavities
in
Cheshire
in similar manner to the appellants. He was a member of
Gas Storage Operators Group, the trade association representing the UK gas
storage industry and appointed vice-chair of the Board of the Utility Networks
Division of the Energy and Utilities Alliance. He was co-author of the EUA
report ‘Gas Storage: securing the future of the UK energy market’.
19.
Mr Dorsett was, clearly, of the two experts, more knowledgeable about
gas cavity
storage facilities as he had 10 years of direct experience of it.
But this did not really seem to make a difference to their evidence in that
both experts, as I have said, were largely agreed on how the sites operated.
20. Their differences of opinion seemed to be mainly limited to definitions and the meaning of words and phrases, such as what was a pressure vessel and what was a pump. The experts submitted separate reports, and both submitted further, supplemental reports. They also agreed a joint statement which set out the main points of disagreement and then both attended the hearing and were cross-examined.
21. I accepted both experts’ evidence in large part; it was, as I have said, consistent in essentials about gas storage. In so far as they disagreed with each other, I have set out below my findings. First, I set out a summary of what they largely appeared agreed on.
The gas industry
22. Mr Aron’s evidence was that the gas industry was comprised of five types of operation:
(1) Extraction and production. Gas is extracted and produced from natural occurring gas reservoirs whether with or without petroleum;
(2) Processing. Gas produced from reservoirs will contain contaminants and be of varying calorific value. The purpose of processing was to reduce the contaminants in, and ensure a uniform calorific value of the gas so that it met the required standard of gas in the National Transmission Service (‘NTS’). This included chemical processing (such as ‘washing’ the gas with acid to remove carbon dioxide).
(3) Transportation/transmission. Gas was transported through the NTS in large pipes at high pressure direct to large users (such as power stations) or to local gas distribution systems which lowered its pressure to a level suitable for local distribution.
(4) Distribution. Local gas distribution systems ultimately delivered gas to end users at just above atmospheric pressure. This would include intermediate pipes which transported gas at lower pressure than the NTS but higher than would be delivered to consumers. Gas pressure would be reduced at the junctions between the NTS and intermediate pipes, and the junctions between the intermediate and local distribution pipes.
(5) Storage. Storage of gas which had already been processed and which, subject to removal of any contaminants from the storage process, is ready to be put (back) into the NTS.
23. To a large extent, this evidence was uncontroversial and self-evident. Mr Codara was unhappy with Mr Aron’s split of the transportation/transmission of gas from the distribution of gas. While Mr Aron’s evidence certainly seemed to reflect the current set up in the industry with National Grid responsible for ‘transportation’ and various gas companies for the ‘distribution’, as Mr Aron himself said, before privatisation there had been a single nationalised industry which was responsible for delivering the gas from the ‘beach’ (as the experts put it) to the consumer.
24. I accept Mr Dorsett was right to say that all the pipes were a single system as all interconnected, but I also accept that Mr Aron was right to say that the gas industry saw transmission (in large pipes at high pressure to gas companies and power stations) as a distinct activity from distribution (to consumers in smaller pipes at lower pressure). But that does not answer the question of what was meant by ‘distribution’ in the Capital Allowances Act (‘CAA’), which is a question to which I return later.
25. I consider the question of whether gas storage was a part of gas distribution/transmission below.
How gas is stored
26. Mr Aron explained that there were five ways of storing gas, which were in:
(1) gas holders (also referred to as gasometers) which are now entirely, or almost entirely, disused but a familiar feature in many towns. They are the distinctive, above ground, large cylindrical containers, which used to rise up and down depending on how much gas they contained, and which are supported by external cross-girders. They held gas at atmospheric pressure;
(2) abandoned gas fields, which, being underneath the sea, are completely invisible. These are beds of porous rock (normally sand), capped by salt rock, to which gas had migrated from shales and been unable to escape. Once the naturally occurring reservoir of gas had been produced, the depleted field can then be used for gas storage by pumping gas back into the field.
(3) abandoned acquifers. Some acquifers, no longer useful for the storage of water, can be converted to store gas. This is expensive and the UK has had no need to store gas in this way having better alternatives.
(4) gas caverns. These are what are in issue in this appeal. They hold gas at high pressure. A single cavern can hold about the same amount of gas as 300 gasometers. They are considered much safer than gasometers as the gas is held underground
(5) Line pack. The gas transportation system, in effect the national and intermediate local pipelines, can effectively be used to store gas in that the amount of gas in the pipe system depends on its pressure; increasing the pressure increases the amount of gas and in effect allows gas to be ‘stored’.
27. My understanding from the evidence was that there were significant practical differences between the different types of storage. For instance, removing gas from storage in abandoned gas fields and acquifers would be slow and likely require removal of significant contaminants. Gas caverns, on the other hand, involved fewer contaminants and allowed ‘fast cycle’ of gas in that the gas could be removed (in relative terms) quickly.
28. This evidence was also largely uncontroversial; the only area of disagreement appeared to be over whether line pack was used for storage. Both experts were agreed that the NTS had a minimum and maximum safe operating pressure and so it was possible to ‘store’ gas in the NTS. Mr Dorsett’s view was that National Grid would not primarily use this ‘line pack’ for storage; Mr Aron’s view was that gas for London was stored in line pack in the intermediate pipes in what he referred to as the distribution system. It seemed to me that the experts’ views on linepack were really very similar and I agree with Mr Cordora that their differences on this point were not material to this appeal and I do not resolve them.
Leaching cavities
29.
The experts, Mr Bebbington, and the parties all seemed agreed on how the
gas cavities
were created, and below is my summary of the process.
30.
In Cheshire,
in particular, there was and is naturally occurring halite
(salt rock) underground. Where it is suitably located, it can be solution
mined by drilling a borehole into it. The water slowly dissolves the salt
rock. The borehole is designed to permit the extraction of much of the
resulting salty water (brine). And if the purpose of the operation was to be
obtain salt, the salt can then be extracted from the brine with a surface level
operation. Extraction of salt from the ground in this way eventually creates a
tear-shaped
cavity
underground full of brine. It is a process referred to as
‘leaching’.
31.
The cavities
are never emptied, but at the end of the leaching process are
left full of brine. The brine exerts pressure on the surrounding rock, whereas
an empty
cavity
would risk fractures in the surrounding rock and ultimately
total or partial collapse of the cavern and possible subsidence of the
surface. The
cavities
are not simply left full of water because any water
would react with the halite surrounding the
cavity
making the
cavity
even
bigger and potentially unstable. (Mr Bebbington mentioned that less careful
solution mining in the past had led to unexpected lakes in the
Cheshire
landscape.)
32.
British Salt, from whom CCS had indirectly acquired the Hill Top Farm
site, had created 10 cavities
at the site in this manner in order to obtain
salt for its business. However, after acquisition for the purpose of conversion
to gas
cavities,
CCS discovered 3 of the
cavities
had interconnections which
made them unsuitable for use to store gas. For safety reasons, CCS took the
decision not to use those 3
cavities
plus the 2 closest to them. So only 5 of
the 10 salt
cavities
on CCS’ site have been used for gas storage.
33.
As I have said, EDF had earlier acquired the Hole House site with one
cavity
and created three more
cavities
in a similar manner to those created for
salt mining. It took about two years to create each gas
cavity
in this
manner.
De-brining cavities
34. Creating a cavern by means of leaching out the halite results, as I have said, in a tear drop shaped cavern full of brine. And, as I have said, because of the risk of partial or total collapse, the cavern cannot simply be emptied. So, over a period of about three months, a suitable salt cavern can be converted to gas storage by the slow exchange of the brine with gas via pipes through the borehole.
35.
At the end of the process, marl (insolubles originally present in the halite)
and a small amount of brine will remain at the bottom of the cavity;
otherwise
the
cavity
will hold gas.
36.
Once filled with gas, sufficient gas to fill the cavern at a certain
minimum pressure must always be left in the chamber to avoid the risk of partial
or total collapse of the cavity.
This gas is referred to as ‘cushion gas’. It
cannot be sold into the NTS as it must remain in the
cavity.
HMRC accept that
the cushion gas in the 8
cavities
the subject of the appeal was owned by the
appellants and was plant.
The properties of the cavities
37.
The halite in which each cavity
was created naturally forms an
impervious barrier to the gas. Therefore, the gas pumped in does not leak out
of the
cavity
into the surrounding rock. So the
cavities
did not need to be
and were not artificially lined in any way.
38.
There is a maximum pressure of gas which a cavity
can safely hold,
beyond which any higher pressure would risk damaging the equipment in the wells
and fracturing surrounding rocks. The maximum pressure at which gas can be
safely stored in a cavern depends on various matters including the depth of the
cavity:
deeper
cavities
can store gas at higher pressure.
39. The difference between the amount of gas which may be stored at the highest safe pressure, and the minimum amount of gas which must be stored to maintain integrity (the cushion gas) was known as ‘working gas’. It was the gas that can be stored in, and removed from, the cavern. Obviously, in practice cushion and working gas were all the same gas stored in the cavern. Referring to gas as ‘cushion gas’ is simply a shorthand method of referring to the minimum amount of gas that had to be left in the cavern for reasons of safety.
40. It was agreed by the parties that any working gas owned by the appellants was their stock in trade.
Moving gas in and out of caverns
41.
It was accepted that the gas cavities
were connected to the NTS. The
cushion and working gas came from the NTS and the working gas would at some
point be restored to the NTS.
42.
On the surface above the cavities,
or near them, and connected to each
other, the
cavities
and the NTS by a system of pipework, was plant which
comprised:
(1) Compressors to move the gas in and out of the caverns and from or to the NTS;
(2) Gas
treatment plant. Its purpose was to remove moisture (hydrate) and to remove
other impurities (condensate) accumulated in the gas while in store in the
cavities
before being returned to the NTS. The treatment plant could also
change the gas temperature to ensure it was within the acceptable temperature
parameters for the NTS.
Within the boreholes that
connected the cavities
to the pipes (and through which gas was introduced and
removed) sit valves and temperature and pressure monitors. Nothing but gas,
marl and brine are in the
cavity
itself. And, it was accepted, it was not
possible for a person to enter a
cavity;
the only point of access was the
borehole in which the pipes sat.
43.
Both experts’ evidence was that the processing carried out when gas from
a cavity
was returned to the NTS was qualitatively different to that carried on
by plant at the ‘beach’ which processed newly produced gas. Gas freshly
produced would have many different sorts of impurities whereas stored gas taken
off the NTS only picked up impurities from where stored. Beach processing
would also include chemical processing. It would alter the calorific value of
the gas to ensure it was within acceptable parameters for domestic use (neither
too strong nor too weak). Processing after storage in a gas
cavity
would not
alter the calorific value, which would have been unaffected by the storage.
I accept their evidence on this as this evidence appeared consistent and to
make sense: what it means for the appeal (if anything) I discuss below.
Free flow of gas from or to a cavity
44.
The experts were agreed that it was possible for gas to free flow from
or to the gas cavity.
If the valves between a
cavity
and the NTS were
opened, and the gas in the NTS was at a different pressure to the gas in the
cavity,
ordinary laws of physics would cause free flow of the gas from the
higher pressure area to the lower pressure area.
45. Everyone appeared agreed that the appellants would, if taking gas from the NTS or putting gas onto the NTS, take advantage of free flow if it was possible to do so. Free flow cost nothing whereas the alternative was to use the compressors to move the gas and that would be expensive. I had no factual evidence on how often the appellants actually moved gas by free flow rather than by using the compressors.
46.
Mr Dorsett’s expert evidence was that, as the NTS was normally at a
higher pressure than either of the appellants’ cavities,
any free flow would
occur on gas entering the cavern rather than leaving it. Mr Aron’s evidence
was that free flow would require a significant difference in pressure between
the NTS and the
cavities
because the pressure differential had to be strong
enough to draw the gas through the appellants’ pipes and processing plant. It
seems to me that it follows logically that this loss of pressure due to
‘resistance’ would be more significant on leaving rather than entering the
cavities,
as the gas was only processed on leaving, and so, again,
consistently with what Mr Dorsett said, suggested free flow was more likely to
occur, if at all, on entering rather than on leaving the
cavities
the subject
of the appeal.
47.
Mr Dorsett did not give an opinion on how often free flow would occur;
Mr Aron did not know either, but was inclined to think it infrequent. Mr Aron
also made the point that, in his view, free flow could not be planned in
advance as it depended (in part) on the pressure of the NTS which would be out
of the appellants’ control. Mr Dorsett pointed out that the appellants had
some control over the pressure in the cavity,
so he thought it too simplistic
to say free flow was entirely out of the appellants’ control.
48.
I find free flow was possible, but could not be planned in advance as it
depended at least in part on factors beyond the appellants’ control and was
most likely to be feasible with gas entering the cavity.
The appellants would
most likely have to turn on the compressors if moving gas from a
cavity
back to
the NTS.
Gas temperature
49.
Mr Dorsett’s evidence was that the temperature of the gas on entering
the cavity
would be influenced by its temperature in the NTS, the temperature
of the gas already in
cavity,
the speed at which the gas was piped into the
cavity,
its pressure and the temperature of the surrounding rock.
50.
I do not think Mr Aron disagreed with this but it was his view that the
most significant influence on the temperature of the gas in the cavity
would be
its pressure. Mr Aron accepted that he lacked experience to know what the
temperature of the gas in the
cavity
would be. His view was that the pressure
of the gas was much more significant to the appellants than its temperature.
He did accept that its temperature and pressure were related in that increased
temperature increased pressure and for that reason it was better to pipe in the
gas slowly so that the temperature rise was lower. Nevertheless, his evidence
that temperature was less significant than pressure made sense as pressure
related directly to how much gas could be stored.
51.
I find that while the temperature of the gas clearly mattered to the
appellants (as it related to pressure, how hydrated the gas became, and because
gas had to be within certain temperature parameters to be restored to the NTS),
and while temperature of the stored gas would be affected by the temperature of
the rock in which it was stored, there was no evidence from which I could
conclude that the appellants used the cavities
to influence the temperature of
the gas to any significant extent. On the contrary, my understanding of what
Mr Dorsett said was that it was the surface plant (and not the
cavities)
which
was used to make any significant alteration to the temperature of the gas
either on entry to or exit from the
cavities.
Moreover, it was a necessary
implication of what he said that any need to alter the temperature of the gas
arose from compressing it and/or storing it and was an incident of the storage
and certainly not the purpose of the storage.
For what did the appellants use the cavities?
52.
It seems that the appellants did not appreciate until the hearing was
underway that there might be a dispute over the use to which the cavities
were
put.
53.
Mr Aron’s expert evidence was that CCS appeared to be fast-cycling gas
(because the balance of gas held regularly changed) and therefore was using its
gas cavities
for trading of gas. He was unable to say on the data available
for what EDF used its
cavities.
Mr Dorsett referred to the appellants being
in the gas storage service industry.
54. The factual evidence on this in large part comprised the accounts as Mr Bebbington was not really asked. He had agreed with counsel that CCS’ business was gas storage but that did not indicate who owned the gas stored nor how fast was the turnover.
55. The accounts for CCS showed that, by 2012 and thereafter, CCS owned significant amounts of working gas, indicating that the fast cycling identified by Mr Aron was on CCS’ own account.
56. The accounts for EDF, however, as Mr Cordara accepted, showed that EDF did not own the gas it stored for the years at issue in this appeal. Its income came from payments from another group company for storing the gas of which that company was owner. The accounts also stated that its income was impaired because gas price volatility was reduced; Mr Cordara inferred from this that EDF also fast-cycled gas, albeit gas belonging to another group entity.
57.
Ms Nathan emphasised her view that there was insufficient evidence on
which I could reach the conclusion that the appellants’ fast-cycled gas or that
CCS owned the gas in its cavities,
but I do not agree. I find that the
facilities, on the basis of the evidence before me, more likely than not were
used for fast cycling storage of gas, although in the case of EDF, it did not
own the gas that was fast cycled, but was paid by the owner(s) for moving and
storing its gas. In other words, the CCS more likely than not intended to make
profit from gas price volatility by trading gas which it owned; EDF more likely
than not intended to make profit by charging customers for using its storage
cavities
so that its customers could make profits from gas price volatility.
Were the appellants in the business of gas distribution or processing?
58. The appellants put the case that their business of storing gas meant that they were in the business of gas distribution and gas processing.
59.
So far as gas distribution was concerned, they saw storage of gas as an
integral part of distribution. When gas in the cavity
was returned to the NTS,
it was, they said, distributed. Moreover, the gas was processed to remove
water and condensates before it was returned to the NTS.
60.
However, while I accept that as a matter of fact the appellants did
process the gas before returning it to the NTS, I do not accept that they were
in the business of processing gas. The evidence of both experts was clear that
the processing was merely a necessary incident of storing the gas: to be
permitted to return gas to the NTS from the cavities
it had to be processed to
restore it to the standard of purity it had when it was removed.
61.
Mr Dorsett said that gas storage played a role in the gas system, but
nevertheless I understood that both experts were agreed that gas storage in
cavities
was unnecessary to gas distribution in the sense that there could be a
gas distribution network without gas
cavities.
Moreover, I find that
returning the gas to the NTS was merely a necessary incident of the appellants
removing the gas from the NTS in the first place in order to make to make
profits from storing gas. In conclusion, I do not accept that the appellants
were in the business of gas distribution either; their business was to store
gas, even if only for a short period. Returning it to the network made the gas
available for distribution but distributing it was not their business.
62. I find that the business of the appellants’ was gas storage and not distribution or processing of gas.
Areas of disagreement
63. The experts, as I said, compiled a list of issues on which they did not agree and they were as follows.
Were gasometers tanks?
64. Mr Aron’s view was that gasholders were not tanks. He relied on a study of gasometers which made a distinction between the gas holder and the water tanks contained within them as an essential part of their mechanism as they prevented the gas escaping. The basis of his view that the report was right not to consider gasometers to be tanks seemed to be because they were part of an active system storing gas at night and releasing it in the day: he thought the report correct to describe them as gas holders. He accepted that tanks could have floating tops and so his view that gasometers were not tanks was not based on the gasometers’ ability to change size.
65. Mr Dorsett disagreed with him on the basis that the dictionary definition of a tank was ‘a large container for holding liquid or gas’ and therefore a gasometer, as a large container for holding gas, was, in his view, a tank. Neither the report relied on by Mr Aron nor he fact that a gasometer had telescopic sides, altered his view it was a tank.
66. This disagreement, as with others, indicated to me that the difference in view between the experts was because Mr Dorsett tended to view things with the same function as the same technical thing; Mr Aron was concerned to use terms as he understood they would be used in the industry in which he worked, and that to him meant he had to consider method of construction as well as function. I did not think that either expert was so much right or wrong but just having a differing view point.
67. From the point of view of this decision, I did not need to resolve whether, in the gas industry, it was technically correct to describe a gasometer as a tank; I did need to decide what ‘tank’ meant as a matter of law and that was not something on which the experts could, or purported to, give evidence. I address it below.
68. Both experts did appear agreed that a tank would be artificially constructed and would be able to hold its shape when empty (at least as long as internal and external pressures were equalised).
Were cavities
tanks?
69.
Mr Aron did not think it would be technically correct to describe a gas
cavity
as a tank. HMRC’s view was that a gas
cavity,
although artificially
created, was just a hole in the ground and at risk of collapse if not filled.
It was suggested to Mr Dorsett that the
cavities
were not tanks because they
were at risk of collapse if emptied of gas or brine. He pointed out that above
ground tanks would also be at risk of collapse if emptied of air. He
considered that because they had the same function as above ground tanks, the
underground
cavities
were tanks.
70.
I consider that whether the cavities
were tanks within the meaning of
the CAA was a question of law and one which I will determine below.
Did the gas caverns operate as pumps?
71.
Mr Dorsett’s opinion was that gas cavities
were able to act as a pump.
Mr Aron did not agree. This led to a discussion between the expert on what a
pump actually was.
72.
Mr Aron’s view was that the gas cavities
could not operate as a pump in
moving gas because a pump did not move gas. Compressors moved gas. While Mr
Dorsett accepted that compressors only moved gas (because only a gas and not a
liquid could be compressed), he considered a pump could be used for any fluid,
either gas or liquid (but not both at the same time).
73. Mr Aron explained his view on the basis that, while both compressors and pumps are rotating equipment (with motors and impellers), in industry compressors used to move gas and pumps are used to move liquids. Liquid in a compressor could cause catastrophic failure, gas in a pump would mean it was inoperable. Compressors tended to be very large and fast while pumps tended to be smaller and slower.
74. Mr Dorsett accepted that, in some industries, it was convention to use pumps only for liquids, but did not agree that it was always wrong to describe equipment which actually moved gas as a pump. As an example, he referred to a bicycle pump. Mr Codara also pointed out that Mr Aron himself had referred to the equipment which put the gas smell into the gas as a ‘small pump’ even though recognising it pumped gas. Mr Aron’s view was that colloquial terminology could be at odds with technical terminology and it was not technically correct to describe rotating equipment which moved gas as a pump. A bicycle pump was technically a piston compressor.
75.
The discussion was very interesting but, it seemed to me, quite
irrelevant other than to reinforce the view set out at §20 on the experts’
differing approaches to terminology. What was clear was that both pumps and
compressors had moving parts and the gas cavities
did not. So when Mr Dorsett
said that
cavities
acted as a pump, he did not mean that they actually had any
moving parts. A
cavity
was not actually a pump or compressor. What he meant
was that the
cavity
could have the same effect as a pump/compressor in that (he
was saying) it could move gas.
76.
To some extent, what he was saying was no more than what Mr Aron agreed
with him on, which was that the pressure differential between the gas in the
cavity
and the gas in the NTS meant that, when the valves between them were
open, there could be free flow as gas would naturally move from higher pressure
to lower pressure areas. However, Mr Dorsett was also saying that the
cavity
caused this effect, and I did not think Mr Aron agreed with him on that. Mr
Aron’s view was that the cause of the free flow was the pressure differential.
The
cavity
did not even create the pressure differential because the
cavity
was
a passive hole in the ground. The pressure differential was caused by the
pressure of gas stored in the
cavity
versus the pressure of gas in the NTS.
The
cavity
was only responsible for the pressure of the gas in the
cavity
in
the sense that the rock in which the
cavity
was formed was impervious to gas
and so prevented it leaking away and the pressure reducing: indeed it might be
said that as these
cavities
were normally at a lower pressure than the NTS, the
halite actually reduced the possibility of free flow by maintaining the
pressure of the gas and not allowing it to reduce further. (This could not be
said of the
cavities
with which Mr Dorsett spend 10 years of his career at
Holcomb as they were deeper and typically stored gas at a higher pressure than
the NTS).
77.
My conclusion was that it was only possible in the loosest sense to say
that gas cavities
acted as pumps: while free flow was possible where there was
sufficient pressure differential between the
cavities
and the NTS, the movement
of the gas was caused by the pressure differential which depended on the
pressure of the gas held by both the
cavity
and the NTS. The
cavity
was a
part, but only a part, of this system in that it was where gas was stored. The
entire system might be said to act as a substitute for a pump/compressor, or at
least to make it (on some occasions) unnecessary to turn on the compressors,
but, I consider, the
cavity
by itself was not a pump and did not, by itself,
act as a pump.
Do the gas caverns operate as pressure vessels?
78. Mr Dorsett said that the caverns operated as pressure vessels as they permitted gas to be stored at greater than atmospheric pressure. Mr Aron agreed that the caverns permitted gas to be stored at pressure but did not agree that that made them pressure vessels.
79.
Mr Aron’s starting position was that the cavities
were not pressure
vessels as they were not covered by the EU Directive on pressure vessels which
was intended to ensure all pressure equipment in the EU was made to same
standard. Mr Dorsett in his supplemental report pointed out that the
Directive was not (in his opinion) intended to cover gas
cavities
and so it was
wrong to draw the conclusion that a gas
cavity
was therefore necessarily not a
pressure vessel. Mr Aron originally accepted this but in cross examination
appeared to have forgotten he had done so as he reverted to his view that the
caverns were not pressure vessels as they were not covered by the Directive.
80.
However, it was also apparent from what he said, that Mr Aron could not
accept that the cavities
were pressure vessels as he could not accept that a
hole in the ground could be described as a vessel. This view seemed aligned
with his view that the
cavities,
as holes in the ground, were without
manufactured sides and could not be described as tanks or containers nor as
pieces of equipment. (I note at one point in his evidence he did not notice
that Mr Cordara described a
cavity
as a ‘container’ but focussed instead on the
question which raised a different issue: when asked directly, he said a
cavity
was not a container.)
81.
I do not have to decide whether the cavities
are pressure vessels as a
matter of law; it is not a term used in the part of the CAA I am called upon to
consider. It is clear that the
cavities
were designed to, and did, hold gas at
pressure. It is also clear that, although artificially constructed, they did
not have sides which were manufactured. The sides to the
cavity
were naturally
occurring rock. Whether this is material to any of the issues I must decide
under the CAA, I will deal with below.
the law
82. It is a basic tenet of tax law that capital expenditure is not deductible from trading profits when calculating liability to tax. The limited exception to this is that some deductions can be claimed for certain capital expenditure. The legislation providing for this is contained in the Capital Allowances Act 2001.
83. That provides as follows:
11 General Conditions as to availability of plant and machinery allowances
(1) Allowances are available under this Part if a person carries on a qualifying activity and incurs qualifying expenditure.
(2) ‘qualifying activity’ has the meaning given by Chapter 2.
(3) Allowances under this Part must be calculated separately for each qualifying activity which a person carries on.
(4) the general rule is that expenditure is qualifying expenditure if –
(a) it is capital expenditure on the provision of plant or machinery wholly or partly for the purposes of the qualifying activity carried on by the person incurring the expenditure, and
(b) the person incurring the expenditure owns the plant or machinery as a result of incurring it.
(5) but the general rule is affected by other provisions of this Act, and in particular by Chapter 3.
84. HMRC accepted that the expenditure on leaching and de-brining was incurred in respect of a qualifying activity, as they accepted that it was incurred for the purposes of the appellants’ trade, and trade was a qualifying activity.
85.
Originally, it appeared that HMRC did not accept that the appellants
came to own the cavities
as a result of incurring the expenditure on them. The
appellant could only speculate on why HMRC held this view, as although the
appellants were only tenants of the sites under which the
cavities
were
created, since 1985 the law has been that in some circumstances a tenant can
obtain capital allowances for expenditure on leasehold property. HMRC did not
pursue the point in the hearing and were in no position to do so in any event
having not made their case clear on it. For the purpose of this appeal, I take
it that condition 11(4)(b) is to be treated as satisfied.
86. The dispute the subject of the appeal was under s 11(4)(a). HMRC did not accept that the expenditure was expenditure ‘on the provision of plant and machinery’. As it was not suggested the expenditure was on ‘machinery’, the dispute was whether the expenditure was on ‘plant’.
Order in which law should be considered.
87.
There is a great deal of case law on the meaning of ‘plant’ and the
parties did not agree whether or not under this case law the cavities
would be
seen as plant. In addition, there is now a legislative code which excludes
from the benefit of allowances certain items which would otherwise qualify as
plant and again the parties were not agreed whether it applied to the
cavities.
And the parties were not even agreed on the order in which I should
approach the resolution of these disputes: should I consider whether the
cavities
were ‘plant’ before or after I considered whether expenditure on them
was expressly excluded by provisions of the CAA from being eligible for capital
allowances, or the other way around?
88.
Mr Codara’s view was that it was logical to address whether the cavities
were plant under common law before looking at statutory exclusions. Judge
Poole had agreed with the appellant on this in SSE Generation [2018] UKFTT 146 at §§26-28 on the basis it was logical first to look at
whether thing was plant before looking to see if it was excluded from benefit
of the allowances.
89. HMRCs position in that case and this was that allowances were statutory so it was more sensible to look at the exclusions first before considering whether it was plant, particularly as Ms Nathan appeared to view the case-law on plant as more convoluted than the statutory exclusions. She noted that the SPC had chosen to look at the exclusions first in the case of Anchor International Ltd, [2003] UKSC SPC00354, although I find on appeal ([2005] STC 411) the High Court did not say which was the proper course for a first instance court to follow.
90. Ms Nathan relied on the explanatory notes to the exclusions and the Hansard report of the Parliamentary debate on them. Her position was that these made it clear that the purpose of the statutory exclusions was to prevent further erosion (which had occurred by judicial interpretation of the meaning of ‘plant’) of the boundary between plant on the one hand (entitled to allowances) and buildings and structures on the other hand (which should not obtain allowances due to their long life). Mr Cordara complained that Hansard should not be referred to as there was no relevant ambiguity in the legislation which needed elucidation.
91.
I did not think that this was a case where the answer to the question of
whether the cavities
were plant, or the question of whether the
cavities
were
excluded by statute, were so clear that I would decide the case without
considering both questions. And as neither party suggested, quite rightly, that
the order in which I considered them would have any effect on the outcome, the
order in which I considered them did not seem to matter and this dispute was
therefore rather anodyne.
92. It seemed to me that the first stage was to identify what it was that the appellant claimed was plant; and then, whether I considered the exclusions first or the meaning of plant first, did not matter as it would not affect the outcome. Clearly, I had to take one issue before the other.
What is the alleged plant?
93.
As I understood it, the claimed plant was the cavities.
The appellant
wanted capital allowances for the costs of leaching and de-brining the
cavities.
While there was a borehole with pipes and equipment within the
pipes, these were already accepted to be plant and no issue arose in respect of
them. The question was simply whether the
cavities
themselves were plant so
that the costs of creating them were entitled to capital allowances.
94. In so far there was a distinction in capital allowances cases between what is referred to as the piecemeal and entirety approach, neither party was advocating an entireties approach. The question was whether the costs of de-brining and leaching, or either of them, were entitled to capital allowances.
Were the cavities
plant?
The case law on plant
95. As I have said, the definition of plant is in case-law. Plant is to be distinguished from stock-in-trade and from premises:
In its ordinary sense….[plant] includes whatever apparatus is used by a business man for carrying on his business – not his stock-in-trade which he buys or makes for sale; but all goods and chattels, fixed or moveable, live or dead, which he keeps for permanent employment in his business.
Per Lindley LJ, Yarmouth v France (1887) 19 QBD 647
There is a well-established distinction, in general terms, between the premises in which the business is carried on and the plant with which the business is carried on. The premises are not plant.
Per Fox LJ Wimpy International Ltd v Warland [1989] STC 273, 279
96. The cases establish that the distinction between plant and stock-in-trade and plant and premises is one of function in the taxpayer’s business: does the thing function as premises or as plant or as stock-in-trade?
In the end each case must be resolved, in my opinion, by considering carefully the nature of the particular trade being carried on, and the relation of the expenditure to the promotion of the trade.
Per Lord Wilberforce in IRC V Scottish and Newcastle Breweries [1982] 2 AER 230
The question in each case is….does the item function as premises or plant? To answer this may involve deciding whether it is more appropriate to describe the item as apparatus for carrying on the business or as the premises in or upon which the business is conducted…..
Per Peter Gibson LJ in Attwood v Anduff Car Wash Ltd [1997] STC 1167 at 1177
Plant and stock in trade
97.
HMRC did not suggest that the cavities
were stock in trade. It was
accepted that the cushion gas was plant and the working gas was stock in
trade.
Premises or plant?
98.
HMRC’s position was that the gas cavities
were the housing, setting or
premises from which the appellants’ business was carried on and was not the
plant with which the business was carried on. HMRC compared the
cavities
to
warehouses where goods are stored; warehouses are premises and not plant. They
safely house the products which the business exists to sell. HMRC considered
the appellants’ business to be one of gas storage and did not accept that the
gas
cavities
should be compared to gasometers.
99.
The appellants said the cavities
were not passive as they stored gas
under pressure and in some circumstances that pressure was used to move the gas
to the NTS. In any event, the Appellants maintained that
cavities
could be
plant even if their function was entirely passive citing Jarrold v John Good
40 TC 681.
Quarantine Kennels
100. So what is the test to distinguish plant and premises? In Carr v Sayer [1992] STC 396 the High Court tried to draw principles together. The principles identified in that case were:
(1) ‘plant carries with it a connotation of equipment or apparatus, either fixed or unfixed’
(2) ‘”machinery or plant” is apt to include equipment of any size. If fixed, a large piece of equipment may readily be described as a structure, but that by itself does not take the equipment outside the range of what would normally be regarded as plant.’
(3) ‘equipment does not cease to be plant merely because it also discharges an additional function, such a providing the place in which the business is carried out’
(4) Buildings…do not cease to be buildings and become plant simply because they are purpose-built for a particular trading activity
(5) One of the functions of a building is to provide shelter and security for people using it and for goods inside it…a building does not partake of the character of plant simply, for example, because it is used for storage by a trader carrying on a storage business. This remains so even if the building has been built as a specially secure building for use as a safe-deposit business….’
Per Sir Donald Nicholls VC
101. In that case, the Court decided that purpose built fixed quarantine kennels for cats and dogs were not plant because it was where and in which the business of the appellant was carried on. The court accepted that temporary, moveable kennels would be plant.
102. Mr Cordara said the Tribunal should use care when considering principle (5) as a safe deposit is treated as plant under the exclusions, to which I refer below. However, I take account of the fact that the Court of Appeal approved the decision in later case of Attwood v Anduff Car Wash Ltd [1997] STC 1167, saying:
‘Yet the premises test was not satisfied because the kennels performed a typical premises function, providing shelter’
Car wash
103. The Anduff decision concerned a car wash site where about 10% of the site by area was the wash hall where the car-washing activity took place while the rest of the site was for moving and parking cars, and vacuuming parked cars. The entire site viewed as a whole was found to function as premises. Even the wash-hall by itself was found not to be plant: while it contained plant (eg the washing equipment), and itself functioned in some way as plant (the building was designed to collect water for re-cycling), to the greater extent its function was as premises as it provided protection from the elements for the plant and machinery and workers, it provided noise reduction and a place to work (including a lobby and WC).
104. So the test is one of function and it can be difficult to apply where the thing in question has both plant-like and premises-like functions. Mr Codara’s view was that if a thing had any plant-like function, it was plant; it was only if it was ‘mere premises’ and without a plant-like function that it would not be plant. That view does not seem consistent with Attwood v Anduff where the wash-hall did have a plant-like function (the recycling of water) but it was insufficient to outweigh its premises-like nature of providing shelter.
Dry Dock
105. The appellant relied on a leading but older case of IRC v Barclay Curle (1969) 45 TC 221 which decided that the work of excavation and concreting of a dry dock was allowable as the dry dock itself was plant. It might be thought that the dry dock, which comprised the entire premises on which the taxpayer operated its business of ship repair, was premises as the car wash site was later found to be in Attwood v Anduff, as it provided the place where the work was carried out, which is a premises function.
106. However, the dry dock also had plant-like functions, firstly because its function was to hold the ships in place while they were worked on; but secondly and even more significantly, it seems to me, was its critical ability of isolating the ship from the water. Its function was compared to that of a crane hoisting a boat out of water for repairs; a crane removed the boat from the water: the dry dock removed the water from around the ship.
107. The Lords ruled that those plant-like functions made the entire dry dock plant. But while the Lords said buildings and structures could be plant if they had plant-like functions, there is nothing in their decision which implied that any plant- like function would automatically make any building and structure plant. And the later case of Anduff shows that this is not so. I conclude that it is a matter of degree where premises have both plant and premises like functions: the question must be which of the functions predominates. With Barclay Curle, the plant-like function of the elimination of the water was critical to the business. In Attwood v Anduff, the premises-like function of the wash hall predominated over its re-cycling of water.
The water tower
108. Another case concerning the border between premises and plant to which I was referred was Margrett v The Lowestoft Water and Gas Company (1935) TC 481. This concerned an above-ground water tank supported by a structure. The tank, by harnessing gravity, was used to increase the pressure of the water supply in the eponymous town. The decision itself is not relevant because the House of Lords in Barclay Curle said it was wrongly decided. The significance in the case is that the Lords said that the water tower should have been treated as plant because it had a function beyond storing water. It was a structure and it provided shelter and containment of the water, but its function was to increase water pressure and that made it plant.
A swimming pool
109. Another case which considered the borderline between structures which were premises and those which were plant was Cooke v Beach Station Caravans [1974] STC 402. The taxpayer in that case claimed that a swimming pool was plant so that he was entitled to allowances on the cost of excavation, terracing, and construction of pool, including concreting and lining it. HMRC’s case was that the pool was merely setting for the appellant’s business of a holiday park.
110. Megarry J referred to Barclay Curle in his decision and was clearly aware of Lord Reid’s statement that:
…a lock which impounds water is not plant although a trader uses it as the source of the water he needs. And a dam is generally simply an improvement of the lock giving a better supply, But I could imagine circumstances in which a dam would be such an integral part of the means required for a trading operation that it should be regarded as plant….
He concluded that the swimming pool was more than just a dam holding water; it was an active part of the business in that it was there to provide entertainment for the holidaymakers. The pool might be a passive reservoir of water in one sense, but it was for active use in that particular business. It was not merely storing water.
Grain silos
111. I see the case of Schofield [1975] STC 353, to which I was often referred in the hearing, as being in much the same vein. In that case, silos for short-term storage of grain were held to be plant. The silos were said to be in the nature of a tool in the taxpayer’s business of grain importation: they were designed to allow quick discharge of the grain (by use of gravity) to the trader’s buyers. The silos were apparatus with which the trade of grain importation was carried out.
Underground sub-station
112. I was referred to other cases. Bradley v London electricity plc [1996] STC 450 concerned a large underground substation which housed transformers distributing electricity. Features of the sub-station, such as the transformers, performed a plant-like function in the appellant’s business of electricity supply and the substation was designed specifically to house them; the substation as a whole was found to function as premises for the trading activity. The court made the point that the silos in Schofield was not mere shelter but were there for the fast and convenient discharge of grain.
Fixtures
113. In the Wimpy International Ltd v Warland [1989] STC 273 case the question was whether the internal decorations of cafes were plant. The Court said that the test was not whether the items were fixtures, although the more affixed the more likely to be premises rather than plant. The Court accepted premises themselves could be (in rare cases) plant. Lloyd LJ said there was no single test but suggested it would be relevant if the item was housing for business or whether it had an extra function.
Analysis
114. Mr Cordara’s position was that I should accept 4 principles from all these cases and those were that
(1) Stock in trade is not plant;
(2) Plant is apparatus used in business;
(3) Mere setting in which business is carried on is not plant;
(4) Setting can be plant if it has plant like function.
115. Ms Nathan accepted propositions (1) and (2) but not (3) and (4). She said that there was no test of ‘mere setting’; the tribunal should just look at function and decide if its function was that of setting or of plant. I thought that both counsel were really saying much the same thing: if the main function of premises was as premises, it was not plant; if it was premises or setting, but its primary or significant function was as plant, it would be one of those rare cases where the premises was plant.
Cases on storage
116. The cases raise the question about structures or equipment used for storage. It is clear that the case law establishes that providing shelter and protection to plant or to stock in trade or to the taxpayer’s customer’s possessions (see Carr v Sayer) is a premises function, at least where immovable property is concerned. Moveable storage equipment appears to be plant: see Carr v Sayer.
117. Such an analysis makes sense of the various statements about the storage of water. In Barclay Curle, mere dams holding water, which are clearly premises, were said to have the premises-like function of storing (ie retaining) water. However, water stored for a purpose other than retention for later use, such as in Magrett, where the water was stored in a tower to increase water pressure in the system, was stored for a plant-like purpose. It was not stored for a purpose that was a premises-like function of protection and retention. And in my view, this was why the Lords in Barclay Curle said it was wrongly decided that the water tower was not plant.
118. In Schofield, Lowry CJ commented that
‘one can see how essential are the silos, in contrast with mere warehouses, to the working of the business’.
Moreover, it seemed important in Schofield that the finding was that the taxpayer’s business was of grain importing (in which the storage of grain was a trifling element) and not the business of grain storage: it was the speed of input and output into the silos which were important and not their capacity to protect and contain.
119. It is not a question of whether the item is essential to the business: premises can be essential to the business, such as in Carr v Sayer, but that does not make the premises plant. Premises are not plant, it seems to me, unless its plant like function is more significant to the taxpayer’s business than its premises–like function.
120. The appellants also relied on the case of Union Cold Storage (1939) 22 TC 547 although they did not refer me to any passages from it. It was their position that it was decided that cold stores were plant because, despite being premises, they performed a plant-like function of making and keeping food cold while in store. Cold rooms preserved stored food. However, as in Schofield, the taxpayer was not in the business of storing food: it was an importer whose business was to sell food. So it seems to me the cold room better enabled the taxpayer to perform its function of selling food fit for human consumption.
Were the gas cavities
plant?
121. The cavities
were essential, indeed central, to the appellants’ business, but that alone
would not make them plant. Premises and plant can both be essential.
122. The gas
cavities
were clearly part of the premises from which the appellants carried on
their businesses. They were not merely fixed to the land, they were a part of
it, like an underground reservoir.
123. That did
not rule out the possibility that they were plant. The authorities were clear
that ‘holes in the ground’ could be plant: Barclay Curle and Beach Station
Caravans both concerned holes in the ground. The more recent case of SSE
Generation also concerned underground construction. Whether the cavities
were plant depended on whether they functioned as premises or whether they
functioned as plant.
124. The
appellants’ business was, I have found, short-term storage of gas. The gas
was fast-cycled in that it moved in and out of the cavities
in the short
term. EDF’s business at the time was to charge other entities for this
short-term storage; CCS’s business aim was to profit from storing gas by buying
the gas at one price and selling it shortly afterwards at a higher price.
125. What was
the function of the cavities
in this business? Their function was to store gas
taken from the NTS safely (so that it did not dissipate) and in a condition
that would allow it to be returned to the NTS (or at least in a state from
which the appellants’ processing plant would be able to restore it to a
condition suitable to be returned to the NTS).
126. The
appellant sought to compare the cavities
to the silos in Schofield and
the water tower in Magrett both of which had a function beyond that of
storage; both used gravity, the silos to enable fast discharge and the water
tower to increase water pressure. The appellants saw the
cavities
as using
pressure to move gas. They saw them as equivalent to pumps/compressors, using
natural forces (as in Schofield and Magrett) in their plant-like
function.
127. However, I
think it clear (particularly from Attwood) that a plant-like function
does not necessarily make premises plant, in circumstances where the premises
also functions as premises. It is a matter of degree. I am prepared to accept
that the cavities
did have a plant like function similar to that of a
pump/compressor in that the manner of construction (a large hole in the ground
connected by pipes to the NTS) meant that when the pressures were right and the
valves open, gas would free flow to or from the
cavity.
However, I accept the
evidence that that was an incident of the construction and not the reason they
were constructed in that manner. The main reason gas was stored in salt
cavities,
as I understood it, was that that gas
cavities
were a safe method of
storing very large amounts of gas in a way that would enable it to be fast-cycled,
and thus opened up the possibility of arbitrage on gas prices. I had no
evidence that their plant-like ability to act like a pump/compressor was
essential: on the contrary, the evidence which I had was that the appellants
had little control over when they would be able to free flow gas and they had
compressors to move the gas when it was not possible. From the evidence I had
I was unable to conclude how often free flow took place and the appellants have
therefore failed to show that it was common let alone a main function of the
cavities.
128. In
contrast, while the water tower stored water, its purpose was to increase
pressure; the silos stored grain but their purpose was fast discharge. Here
the purpose of the cavities
was to store gas and not to free flow it. Where
premises have a function of storage, that is a premises-like function and not a
plant-like function.
129. I did not understand the appellants to be arguing that a function of fast-cycle storage was a plant-like function. Schofield might suggest it was, as the grain was put into and discharged from the silos in short order, but I do not think that was the ratio of the case. In Schofield the taxpayer’s business was distribution and not storage. I consider that in this appeal, the appellant’s business was storage, for however short a term. They were not, unlike in Schofield or in the case involving a cold store, buying and importing for immediate sale on arrival, but deliberately storing the product (in this case, gas) in order to profit from a price increase while the gas was stored (in the case of CCS) or to profit by allowing another company to profit from a price increase while the gas was stored (in the case of EDF).
130. So the
premises-like function of shelter and containment was, I find, the significant
and predominant function of the cavities.
It makes no difference that there
was a fast turnover as the function was storage.
131. The
appellants pointed out that a cold room was premises with a storage function
which was plant. But, as I understand it, that was because the cold room’s
main function was to reduce the temperature of what was stored. While the
evidence was that the cavity
itself might influence the temperature of the gas,
it was not the main influence and, in any event, altering the temperature of
the gas was clearly not a function of the
cavity.
132. Rather, I
understood the appellants relied on this case for the proposition that the
function of the cavity
was not merely to store gas but to store gas at high
pressure, and the
cavities
should be compared to a cold room which allowed
storage at low temperature. The
cavities
were clearly constructed as they were
in a layer of halite which enabled high pressure storage of gas. Whether or
not technically a pressure vessel, they functioned as a pressure vessel and
therefore, said the appellants, the
cavities
had a plant-like function.
133. But I
consider that the purpose of the high pressure was simply to store more gas. So,
the ability of the cavities
to store gas at high pressure was a premises like
function as it meant that the
cavities
were just very good premises for storing
gas. Merely being purpose built and very good at performing their
premises-like function of storage did not make the
cavities
plant.
134. My
conclusion is that the cavities
were not plant. That is sufficient to dismiss
the appeal. Nevertheless, bearing in mind that this case might go higher and
that I had full argument, I will set out my conclusions on the second part of
the appeal as well.
Outline of Exclusions from caa
135. Dealing with exclusions from capital allowances, s 22 CAA provided:
Section 22 Structures, assets and works
(1) For the purposes of this Act, expenditure on the provision of plant or machinery does not include expenditure on -
(a) the provision of a structure or other asset in List B, or
(b) any works involving the alteration of land.
List B set out in paragraphs 1-6, various types of
excluded structure/asset (including tunnels, bridges, dams, reservoirs, dikes,
canals, hard standing and docks). HMRC accepted that the gas cavities
did not
fall anywhere in paragraphs 1-6. However, at paragraph 7, List B included
within the scope of the excluded structures:
7. Any structure not within items 1 to 6 other than -
(a) …not applicable….
(b) a structure in use for the purposes of an undertaking for the extraction, production, processing or distribution of gas, and
(c)…not applicable…..
136. In
summary, putting aside the question whether the gas cavities
were ‘plant or
machinery’, if they were a structure, they were excluded by List B paragraph 7 unless
they were a structure in use for the purposes of an undertaking for the
extraction, production, processing or distribution of gas. HMRC’s position
was that the gas
cavities,
if a structure, were a structure which was not
for the purposes of such an undertaking.
137. In the
alternative, it was HMRC’s case that the expenditure on the gas cavities
was
expenditure on works involving the alteration of land and therefore excluded by
s 22(1)(b). I will deal with s 22(1) in detail below but at present continue
set out an outline of the legislation.
138. The other relevant subsections of 22 CAA were:
(2) The provision of a structure or other asset includes its construction or acquisition.
(3) In this section –
(a) ‘structure’ means a fixed structure of any kind, other than a building (as defined by s 21(3)), and
(b) ‘land’ does not include buildings or other structures, but otherwise has the meaning given in Schedule 1 to the Interpretation Act 1978.
139. S 22 CAA also provided, in (4), that it was subject to s 23 CAA. S 23(3) CAA provided that any expenditure on an item in List C would be unaffected by the provisions of s 22. List C therefore comprised further exceptions to all the exclusions of s 22, including List B. The items in List C potentially relevant to this appeal were as follows:
4. Manufacturing or processing equipment; storage equipment (including cold rooms); display equipment; and counters, checkouts and similar equipment.
22. The alteration of land for the purposes only of installing plant or machinery.
28. the provision of –
(a) silos provided for temporary storage, or
(b) storage tanks
140. I will take them out of order as it is more logically to consider the items relating to storage and then the question of alteration of land. First, I will consider general questions of how the statutory provisions should be understood.
Statutory interpretation
141. The parties were agreed that statutory interpretation should be purposive but did not agree on what that meant. Ms Nathan relied on UBS [2016] UKSC 13 and Barclays Mercantile [2004] UKHL 51 which had cited Lord Wilberforce in Ramsay where he said:
‘tax is generally imposed by reference to economic activities or transactions which exist in the real world’
She also relied on [61] of UBS where Lord Reed said:
‘the modern approach to statutory construction is to have regard to the purpose of a particular provision and interpret its language, so far as possible, in the way which best gives effect to that purpose.’
142. It was her position, firstly, that such purposive construction applied in capital allowance cases as in any other tax case (and cited J D Weatherspoon plc [2012] UKUT 42 (TCC) at [54]: ‘We are required to apply tax law purposively’). Secondly, it was her point that words should be given real-world meanings. She thought that the Tribunal should understand words ‘processing’ and ‘distribution’ used in respect of gas undertakings in the way Mr Aron understood them as he was an expert in the gas industry.
143. Mr Cordara did not agree. Apart from the fact that he did not accept Mr Aron’s evidence on this point, he also pointed out that in Britax [2002] EWCA Civ 806, where counsel had suggested that the word ‘hiring’ used in legislation should be given the meaning it would be given in a commercial context, which would not include finance leasing, the Court of Appeal had not agreed. The Court said:
[68] ‘where [statutory] language is capable of bearing more than one meaning, the court will look to construe it in a way which accords with ‘the purpose and the spirit of the legislation’.
144. While Ms Nathan said she was uncertain that I should put too much weight on what was said in Brittax which was before cases such as UBS, it seems to me that what was said here was quite uncontroversial: a purposive interpretation means looking at the context to decide what Parliament intended by the words they used. So it is possible that they used a word in a technical sense but whether they did so depends on the context. I will go on to consider what Parliament actually meant by the words they used in the relevant parts of CAA.
Should items on Lists B and C have a functional interpretation?
145. HMRC’s case was that Lists B and C should be read descriptively: was the item in question described by anything on List B or C? The appellants’ case was that the question was whether the function of the thing in question was the same function as anything described on the list. Their rationale for this view was that, especially with regards List C, Parliament had intended to implement pre-existing case law on plant and the test for plant in case law was functional.
146. Ms Nathan’s position was that the explanatory notes to, and the Parliamentary debate of, the CAA showed that Parliament’s purpose was to exclude buildings, structures and alterations to land from capital allowances, other than those which decided case law had already decided were entitled to capital allowances. It was intended as a descriptive and not functional test as it was not replicating the case-law test for plant but qualifying it.
147. I consider that HMRC are right to say that the explanatory notes and, in particular, Hansard indicate that Parliament’s reason for introduction of the exclusions and exemptions to the exclusions was to prevent buildings/structures with long life getting relief intended for items with shorter life and that their intention was to do so by modifying the effect of the case law on plant So I take from this that Parliament was more concerned with the structure-like nature of the item in question than with its function. Mr Cordara considered that Hansard could not be referred to as no ambiguity was shown. But it seems to me that the explanatory notes could be referred to, and in so far as there was ambiguity in whether Lists B and C were intended as descriptive or functional tests, Hansard made it clear that a functional test was not intended.
Analogies
HMRC’s case was also that Lists B/C should not be extended by analogy, unless the legislation specifically provided for this by using expressions such as ‘such as’ or ‘any other structures’. She referred to the Court of Appeal decision in Henriksen v Grafton Hotel Ltd [1942] 1 KB 82 where the Court said:
…it frequently happens in Income Tax cases that the same result in a business sense can be secured by two different legal transactions, one of which may attract tax and the other not. This is no justification for saying that a taxpayer who has adopted the method which attracts tax is to be treated as though he had chosen the method which does not, or vice versa.’
Per Lord Greene.
However, that is too general to be helpful in this context. What I do accept is that List B and C were not intended by Parliament to be a test of function because they were intended as qualifications on what case law had found to be plant, which was a functional test. Therefore, Parliament did not intend analogies based on function other than where this was made clear.
List C was definitive
148. HMRC’s
last point was that List C was definitive and it was not possible to say that
the gas cavities
should be treated as within List C simply because they might
be analogous to items in List C, such as storage tanks.
149. The
appellant agreed with this in principle but pointed out that, in its view, the
always speaking doctrine would apply to new technology so that the Tribunal had
to decide whether the new technology shared the same inherent characteristics
as items within the Act of Parliament. HMRC did not accept that the always
speaking doctrine had any application as gas cavity
technology dated back to
the 1960s and predated the CAA 1990.
150. I agree
that List C is definitive and the always speaking doctrine is not applicable as
the expert evidence was clear that the technology pre-dated the legislation.
The question is whether gas cavities
were one of the items (such as a storage
tank) described in List C.
151. I will
consider the application of the exclusions to gas cavities
but first mention
HMRC’s application to amend their statement of case.
Application to amend statement of case
152. Shortly before the hearing a dispute arose between the parties because Ms Nathan wanted to include in the bundle authorities on the meaning of structure. S22(1) excluded certain structures and alterations to land; however, List B paragraph 7(b) contained an exemption for structures ‘in use for the purposes of an undertaking for the extraction, production, processing or distribution of gas’. The appellants’ case was that they fell into this exemption.
153. Mr Cordara
said the authorities Ms Nathan wished to rely on were irrelevant because HMRC
had not pleaded that the cavities
were not structures. HMRC’s position was
that it was their case that the
cavities
were not structures; at the start of
the hearing Ms Nathan said that this was already a part of HMRC’s pleaded case
but if HMRC did need to amend their statement of case to include this argument,
then she was applying to do so.
154. My ruling
in the hearing was that I did not think that HMRC had pleaded a case on this.
Ms Nathan said it was implicit in HMRC’s statement of case but I found that all
the statement said on this was that the cavities
were not in List B Item 7
because ‘a gas storage facility does not fit comfortably within the description
of a permitted structure given that it neither extracts, produces, processes
nor distributes gas. At most, it stores gas prior to its distribution’. I
considered that any reasonable reader would only take from this that HMRC did
not accept that the
cavities
were not ‘in use for the purposes of an
undertaking for the extraction, production, processing or distribution of
gas’: there was nothing to alert the appellant to HMRC’s case that the
cavities
were not in List B item 7(b) because they were not structures.
155. The next
question was whether I should permit HMRC to amend their case on this. But
their case was not presaged in their statement nor in their skeleton. Even at
the hearing, the appellant did not know why HMRC considered that the cavities
were not structures. I considered the appellants taken by surprise.
156. I also
considered that they were disadvantaged by the lack of warning. Ms Nathan had
indicated that she intended to ask Mr Bebbington questions relevant to HMRC’s
case that the cavities
were not structures so even HMRC saw it as something on
which evidence could be given (even though Ms Nathan also described it as a
pure legal point). The appellants, however, had been given no chance to
consider whether to call evidence on the matter as they had had no forewarning
of HMRC’s case on this.
157. So, in the
hearing, I refused HMRC permission to amend their statement of case. It was a
very late amendment. The appellants were prejudiced by not knowing HMRC’s case
on this in advance as they had not been able to prepare their legal or factual
case to meet this challenge. It was unfortunate that the appeal would have to
continue on the assumption that the cavities
were structures and so this aspect
of the legal position would be given no consideration, but that was necessary
in order to ensure the proceedings were fair to both parties.
158. So the
List B question for the Tribunal would only be whether the cavities
in use for
the purposes of an undertaking for the extraction, production, processing or
distribution of gas; the Tribunal would assume the
cavities
were structures.
And I move on to consider that question.
An undertaking for the extraction, production, processing or distribution of gas
159. As stated
above, HMRC’s position was that the expenditure on the gas cavities
was
excluded by s 22 because the gas
cavities
were structures within List B. All
structures outside items 1-6 were excluded unless they fell within paragraph 7
(a), (b) or (c). It was agreed (a) and (c) were inapplicable. Item 7(b) was,
as I have said:
a structure in use for the purposes of an undertaking for the extraction, production, processing or distribution of gas
HMRC said the cavities
were not such structures. Their
case on this was two fold:
(1) The
cavities
(said HMRC) were not in use for the purposes of an undertaking;
(2) The
cavities
(said HMRC) were not used in the distribution or processing of gas
(and it was accepted, and indeed obvious, that they were not used for the
extraction or production of gas).
Meaning of undertaking
160. I think both parties were agreed that the word ‘undertaking’ had two possible meanings:
(1) One meaning referred to an entity (typically a company, partnership or sole trader);
(2) The other meaning referred to the doing of an action or task.
161. What they did not agree on was which meaning was intended in the context of List B.
162. HMRC’s case was that it was the second meaning which was intended. HMRC point out that if Parliament had used the word ‘undertaking’ to mean ‘entity’, it would have been more grammatical to say:
…a structure in use for the purposes of an undertaking whose business includes the extraction production processing or distribution of gas….
Further, HMRC pointed out that List B paragraph 7(c) used
a similar sentence construction and referred to ‘a trade which consists in the
provision of telecommunication…..services’; their inference was that in both
(b) and (c) Parliament was describing what was done, rather than who was doing
it. If HMRC was right, it would mean the question posed was the use of the
cavities
themselves rather than what was the business of the entity using the
cavities.
163. The appellant thought that the first meaning was intended. It thought ‘undertaking’ referred to the nature of the business undertaken by the taxpayer. It relied on an Australian case of Top of the Cross Pty Ltd (1980) 50 FLR 19 which had held that although the meaning of ‘undertaking’ would come from the context in which it was used, its typical meaning was business or enterprise.
164. The appellant also said that the current legislation and legislative history showed the word took the first meaning. S 274(1)(b) CAA, and its predecessor s 18(1) CAA 1990, referred to undertakings and, said Mr Cordora, clearly intended to refer to undertakings as entities. Ms Nathan did not agree and pointed out that both these sections referred to a ‘tunnel undertaking’, a ‘bridge undertaking’ and a ‘dock undertaking’ which she inferred was using undertaking in the ‘action’ rather than ‘entity’ sense.
165. I would point out that the heading to Table B in s274 was:
Undertakings which are ‘qualifying trades’ if carried on by way of trade
which seems to me to indicate, similarly with the phrases like ‘bridge undertaking’ that Parliament intended undertaking in s 274 to refer to an action rather than an entity. It seems right to suppose, where there are no contrary indications, that a word has the same meaning wherever used in the same statute, and therefore, also taking into account the point on grammar made by Ms Nathan, I consider ‘undertaking’ in the context of List B was intended to take the second meaning.
Cavities
used for the purposes of an undertaking for the
…distribution/processing of gas?
166. The next
logical question was whether the cavities
were used for the purposes of an
undertaking for the (in the sense of the action or task of) processing or
distribution of gas?
167. HMRC’s
case was that the cavities
were used to store gas. They were not, said HMRC,
therefore for the purpose of an undertaking for the distribution or processing
of gas. HMRC went further and said that the NTS was not itself undertaking the
distribution or processing of gas. The NTS was (relying on Mr Aron’s and Mr
Bebbington’s evidence) part of gas transmission (high pressure gas moved
from processing to distribution pipes) and not a part of the gas distribution
network (lower pressure pipes which took gas from the NTS and delivered it to
users).
168. Ms Nathan
also said that at the time the legislation was drafted, gas storage, even gas
storage in cavities
was a known technology (and I accept that that is so on the
evidence), and so it had to be presumed Parliament’s failure to include
‘storage’ in the list was a deliberate choice.
169. The appellants disagreed and thought it acte clair that the assets were used in the distribution and/or processing of gas. The appellants processed the gas before returning it to the NTS; by returning the gas to the NTS, the appellants were distributing it. More generally, the appellants saw their ability to store gas as being part of the national gas distribution network. The gas could be quickly put back into the NTS if required.
Processing
170. I will
deal with the question of processing first. The appellants did process the
gas. They had to process the gas to restore it to the same condition that it
was when taken off the NTS. Hydrates and condensates which had collected in it
during storage had to be removed and its temperature might need adjusting. It
seems to me that, whichever meaning is attributed to ‘undertaking’, the
cavities
were not used for the purposes of an undertaking for the processing of
gas.
171. If (as I
consider right), ‘undertaking’ is understood to mean a task or action, the
cavities
were not used for the task or action of processing the gas. The
processing was not done by or in the
cavities
but in the processing plant above
ground. Nor did the
cavities
store the gas so that it could be processed; it
was the other way around. The processing was an incident of the storage.
172. And if
‘undertaking’ is understood to mean an entity, then the cavities
were not used
by an entity for the processing of gas. The appellants’ purpose was not to
process gas. The appellant’s purpose was to store gas. They used the
cavities
for this purpose. The appellants did process gas, but only as
necessary incident of their storage of the gas. It was not their purpose.
Distribution
173. So were
the cavities
used for the purposes of an undertaking for the distribution
of gas? As I said above, the question is what Parliament can be supposed to
have intended from the context in which the word to be interpreted was used.
While I accept that in the industry, as both Mr Aron and Mr Bebbington said, a
distinction is drawn between transmission and distribution, and the NTS is the
transmission system and not seen as a part of the distribution system, I do not
think that Parliament used the word ‘distribution’ in that technical sense.
The context of the legislation as a whole is legislation which does not use
words in their industry-specific technical sense. It makes little sense to
suggest that Parliament intended to use terminology specific to the gas
industry in a section which covers all industry as a whole, and I do not think
that they did.
174. I consider
that the NTS is a part of the ‘distribution’ of gas as encompassed by List B
Item 7(b). But are the cavities
a part of the distribution system of gas? The
cavities
themselves do not distribute gas: on the contrary, they store it.
Nor are they used to support the distribution system: they are used to
fast-cycle gas in order to make money from price volatility.
175. If (as I
consider right), ‘undertaking’ is understood to mean a task or action, the cavities
were not used for the task or action of distributing the gas. The
cavities
did
not distribute gas but store it.
176. If
undertaking should be understood as meaning an entity, however, then it is a
more difficult question to answer whether the cavities
were used by an entity
for the distribution of gas. On one level, it could be said that the
appellants’ purpose was not to distribute gas but to make profits by storing
it. However, CCS could only make money from storing the gas by selling the gas
back onto to the NTS for onward distribution. EDF made its money by allowing
fast cycle storage of gas belonging to its customer so the ability to sell the
gas back onto the NTS so that it could be distributed was also crucial to EDF’s
business.
177. I do not have to resolve this particular dispute because I have already said that ‘undertaking’ in this context means task or action and not entity, but if I had to resolve it, I would have said that the appellants were entities for gas storage and not for gas distribution. While they both existed to enable stored gas to be sold back onto the NTS, they did not themselves distribute gas by transmitting it to users or other transmitters. They simply sold the gas they stored.
178. My
conclusion is therefore that the cavities
were on List B as ‘any structure’ and
were thereby excluded from benefit of capital allowances. They were not saved
by falling into Item 7(b) as they were not structures in use for the purposes
of an undertaking for the extraction, production, processing or distribution of
gas.
179. It is
therefore not relevant to consider whether the cavities
were also excluded from
the benefit of capital allowances by considering whether s 22(1)(b) applied,
but for the sake of completeness I will do so.
Works involving the alteration of land
180. Two issues
arose under this heading. Firstly, if the gas cavities
were not excluded under
s 22(1)(a), could they be excluded under s 22(1)(b)? As a reminder, s 22(1)
contained two exclusions:
(1) For the purposes of this Act, expenditure on the provision of plant or machinery does not include expenditure on -
(a) the provision of a structure or other asset in List B, or
(b) any works involving the alteration of land.
If (a) and (b) were mutually exclusive, because HMRC had
in effect conceded that the cavities
were structures, and List B in effect
applied to ‘any structure’, the
cavities
could not fall into s 22(1)(b) as
works involving the alteration of land.
181. The second issue was whether the works undertaken (leaching and de-brining) actually involved the alteration of land. I will take these two issues in turn.
Are s 22(1)(a) and (b) mutually exclusive?
182. Mr Codara’s position was that s 22(1)(a) and (b) had to be mutually exclusive because virtually everything in List B involved the alteration of land and so List B would be pointless unless (a) and (b) were mutually exclusive. Judge Poole had recently come to a similar conclusion in SSE Generation at [39-40]:
40. I prefer Mr Peacock’s approach in principle. I consider sections 22(1)(a) and (b) CAA to be alternatives, not largely overlapping, and that the “works” referred to in section 22(1)(b) CAA must be works where the alteration of land is the objective in its own right, not including works whose objective is the creation of some other asset or structure identified in List B.
183. HMRC did not consider SSE Generation rightly decided and had appealed it. Ms Nathan referred me to the decision in Maco Door and Window Hardware (UK) Ltd [2008] UKHL 54 where, in respect of a different part of the capital allowances legislation, the House of Lords concluded that certain categories could not be mutually exclusively precisely because one was a subset of the other.
184. Mr Cordara’s response was that the provisions in question in Maco Door granted allowances; here s 22 excluded assets from the benefit of allowances so, he said, it would make little sense for one to be the sub-set of the other.
185. I agree with Judge Poole’s analysis. Parliament was careful in Item 7(a)-(c) to grant exemptions from the general exclusion for structures and assets in s 22(1)(b). That section of the legislation would be rendered pointless if those exempt assets fell foul of s 22(1)(b). As that cannot have been intended, it must have been intended that structures or assets within s 22(1)(a) were not works within s 22(1)(b).
Were the works an alteration of land?
186. I do not therefore need to consider whether the leaching and de-brining were ‘works involving the alteration of land’ but for completeness will do so as the point was argued.
187. The
question of whether the leaching was works involving the alteration of land is
easily answered as the appellant concedes that it was; I think it a concession
well made as the introduction of water into halite dissolved it and created an
underground cavity
where there was previously none. The land was clearly
altered. I note in passing that the creation of underground
cavities
in SSE
Generation was also considered to be works of alteration to land (albeit
‘land’ in that context just carried the unmodified Interpretation Act meaning):
[108] ‘In my view, the caverns clearly fell outside any of the Items in List B,,,but quite clearly amounted to “works involving the alteration of land”
188. But did
de-brining alter the land? HMRC said it did because what was an underground
cavern containing salt water became an underground cavern containing gas.
Removing the brine improved the land by making the cavity
fit for gas
storage. The appellant said de-brining did not alter the land: the
cavity
itself remained unaltered whether it contained brine or gas.
189. Mr Cordara referred to the definition of land applicable to s 22. By s 22(3)(b) it was stated that:
‘land’ does not include buildings or other structures, but otherwise has the meaning given in Sch 1 to the Interpretation Act 1978
His interpretation of this was that ‘land’ was therefore
the soil and rock; it did not include brine in a cavity
and so there was no
alteration to land by removing brine from a
cavity.
190. I am not
able to agree with the appellant on this. The evidence was that the cavity
was
unlikely to be stable if left empty; the brine or the cushion gas with which it
was replaced had a structural purpose and, I consider, should be seen as part
of the land. So when the brine was exchanged for gas there was an alteration
to the land. In any event, works, say, to drain land would be considered works
altering land so it seems that de-brining a
cavity
is also work altering land.
191. So, if I
had not concluded that s 22(1)(a) and (b) were mutually exclusive, I would have
held the costs of leaching and de-brining were excluded from capital allowances
under s 22(1)(b) as works involving the alteration of land. But I do consider
them mutually exclusive; nevertheless, although it is conceded by both parties
that the cavities
were structures so that s 22(1)(a) applied, I have held that
the
cavities
do not fall into paragraph 7(b) as structures in use for the
purposes of an undertaking for the extraction, production, processing or
distribution of gas and so they would be excluded from the benefit of capital
allowances under s 22(1)(a).
192. Having
said that, as I have explained above, whether the cavities
were excluded under
s 22(1)(a) and/or s 22(1)(b) (as I have found that they were) does not matter
if they fell within the exemptions set out in List C. So I will consider each
of the three potentially applicable exemptions, although, as I have said, this
section on the exclusions and exemptions from exclusions is all hypothetical as
I have concluded that the
cavities
were not plant.
List C – item 4 - Storage equipment?
193. The first relevant item of List C was no. 4 which applied to:
4. Manufacturing or processing equipment; storage equipment (including cold rooms); display equipment; and counters, checkouts and similar equipment.
While I have set out no 4 in full, in reality the
appellant’s case was that the gas cavities
were ‘storage equipment’.
194. While HMRC
accepted (rightly) that the gas cavities
were for storage, they did not accept
that they were ‘equipment’. HMRC relied on the definition in the Shorter
English dictionary that
Articles used or required for a particular purpose; apparatus
HMRC’s position was that underground cavities
could not
be described as articles or apparatus, however much they might have a purpose.
195. The
appellant’s position was that the cavities
were equipment because they were, or
served as, pressure vessels for storage of gas. Moreover, if a cold room is
‘equipment’ it naturally followed that another storage structure, such as a gas
cavity,
was also equipment. They were both permanent, fixed man-made spaces
for storage under particular conditions.
196. I’m going to consider what Parliament meant by the use of ‘equipment’ in this context by considering the normal meaning of ‘equipment’ and then whether a different and wider meaning was intended because it was said to include cold rooms.
197. With the exception of the reference to cold room, everything else in item 4 is some sort of ‘equipment’ in the normal meaning of the word even though some of them might be well be fixtures when used (eg manufacturing equipment and counters). Were it not for the reference to cold rooms, I would consider that Parliament intended ‘equipment’ to be used with its normal meaning.
198. It
follows, therefore, that although Mr Aron’s evidence was that industry would
not consider a cavity
to be equipment, I do not consider that matters as the
question is its normal and not technical meaning. I am not clear whether Mr
Aron’s view that equipment had to have moving parts was a personal view or a
view which reflected that of industry, but I do not accept that it is
relevant. The normal meaning of equipment would not require moving parts, only
that it is an article with a purpose.
199. However, I
agree with HMRC that the word ‘equipment’ would not in normal usage encompass
an underground cavity,
even one that was man-made for a particular purpose.
The word ‘equipment’, as well as the words ‘article’ and ‘apparatus’ used to
define it, imply a thing that is not a part of the land (although it might
include something that has been fixed to the land in order to use it).
Equipment may not be portable but it is not a part of the landscape. The
cavity,
however, is formed in rock. It is part of the land and not fixed to it.
200. But should ‘storage equipment’ be understood to have a wider than normal meaning as it is stated to include cold rooms, which, if fixed, are a part of land? I would not consider a cold room to be an article. I would assume it was a purpose built structure or part of a structure with design features which enable (normally only when powered) a cold temperature to be maintained. So should other structures with a storage function be considered storage equipment?
201. It seems to me that drafter understood that ‘storage equipment’ would not include cold rooms, and so specifically included it as Parliament wished cold rooms to have the benefit of capital allowances (perhaps to reflect the Union Storage case). I do not think there was an intention to widen the meaning of ‘equipment’ generally as the drafter said ‘including’ cold rooms and not ‘such as’ cold rooms. I have already said I do not think Parliament meant the exemptions to be widened by analogies with function.
202. My
conclusion is that item 4 is fairly narrowly drawn and would not ordinarily
extend to structures with a purpose although it would appear to extend to fixed
apparatus. While it was clearly intended to extend to cold rooms, it was not
intended to extend to store rooms, or it would have said more than simply
‘including cold rooms’. So Item 4 does not cover the cavities
as they are not
equipment. They are part of the sub-surface rock.
203. But even
if I am wrong and it is possible to extend List C by analogy and so other
structures with a function like a cold room should benefit from the exemption,
I do not think that the cavity
functioned as a cold room. A cold room is
designed to operate on the thing stored by reducing its temperature.
Cavities
were not designed to operate on the gas stored other than in the sense that
they were designed to retain it. While they might have an effect on
temperature, it was not their purpose nor a significant effect. And while they
were designed to store gas at greater than atmospheric pressure, that did not
change the gas in any way but merely allowed a large quantity to be stored;
moreover (unlike a cold room) the
cavities
did not require any parts or power
to do so. It was just the natural effect of a large hole in salt rock. I do
not think the
cavities
are analogous to cold rooms. My conclusion is that the
cavities
do not fall within item 4 of List C.
List C - Silos or storage tanks?
204. It makes sense to then look at the last potentially relevant item in List C, no. 28, as that was:
28. the provision of –
(a) silos provided for temporary storage, or
(b) storage tanks
205. The
reference in 28(a) to silos provided for temporary storage appears to be a
reference to the decision in Schofield and to show Parliament intended
that the new exclusions would not affect existing caselaw. As I understood it,
the appellants did not suggest that their cavities
were silos and so 28(a) is
not really relevant, other than perhaps to the appellants’ case that List C
should be extended by analogy.
206. I agree
that the cavities
were not silos as the dictionary definition of silos shows
that its normal meaning is:
A pit or underground chamber used for the storage of grain, roots, etc.
and it is not apt to describe cavities
for storage of
gas.
207. So far as the question of analogies are concerned, I agree with HMRC that List C is meant to be descriptive and not to be extended by analogies on function. In other words, something which does not meet the description but which does carry out a similar function was not intended by Parliament to be in List C as the purpose of the exemptions to the exclusions was to preserve the outcome of decided cases on plant but to reverse the perceived trend in cases of long term structures receiving capital allowances.
208. It was
that appellants’ case that the cavities
were storage tanks. I agree that the
cavities
were for storage: I do not think that that was in dispute but it is
clear on the evidence in any event. But were they tanks? I was referred to the
OED definition for tank which was:
Artificial receptacle, usually rectangular or cylindrical and often of plate- iron used for storing water, oil or other liquids in large quantities.
209. The
appellants were not concerned that the cavities
were not rectangular or
cylindrical: the definition only said tanks were ‘usually’ such shape.
Further, they did not consider that it was relevant that they were not made of
plate iron as the definition only said tanks were ‘often’ so made. I agree and
HMRC did not suggest otherwise.
210. The
cavities
were also clearly artificial. They were man-made by a process of
leaching. I also do not think their size relevant: tanks could be very large
(see BP Refinery v Walker).
211. HMRC’s
case that they were not tanks rested on their view that tanks had to be made or
manufactured out of something and the cavities
were not really made of
anything: they were a hole in the ground, an absence of rock. They were not
even lined. And a further issue was that the above OED reference clearly
regarded a tank as used for storing liquids. Gas is a fluid but not a liquid.
212. However, the Shorter OED definition of ‘tank’ to which I was also referred was:
A (large) receptacle or storage chamber for liquid or gas
Nevertheless, the only reference to a ‘gas tank’ in the OED appeared to be from an American source and to refer to a petrol tank, and therefore to be for storing liquid. I also bear in mind that Mr Aron said that he would not regards gasometers as tanks and indeed a book about them referred to them as gas holders. My conclusion was that it was not a common use of the word ‘tank’ to refer to it as a container for the storage of gas rather than liquid.
213. Having
said that, I was also aware that prior to use as gas cavities,
the
cavities
had
held liquid, as they held brine, albeit not for storage. Storage is not the
only purpose of a tank: for instance, a fish tank is a tank and it purpose is
to retain the water necessary to the life of the fish. So would the
cavities
properly be described as tanks when they held the brine? Because, if so, it
would be odd if they ceased to be tanks when the brine was exchanged for gas.
214. But I did
not think it a natural use of the word ‘tank’ to describe a cavity
in rock
which was full of brine, particularly when the purpose of holding the brine in
the
cavity
was not for retaining the liquid but to maintain the integrity of
the
cavity.
215. So when
gas was exchanged for brine, when the purpose of the cavities
became one of
retaining a gas, did that mean that they were or became tanks? While it is
possible that the word ‘tank’ could be used to describe a container holding a
gas, it is normally only used for liquids; and while the etymology of ‘tank’ is
concerned with cisterns, which can be underground and cut from rock, cisterns
are only for water and the modern meaning of tank does not really encompass a
cistern, and even if it did, it would not be something for holding gas. I came
to the conclusion that it would not be a natural use of the word ‘tank’ to
describe an underground chamber formed out of the rock and used to store gas.
Moreover, the legislation post-dated the technology so there was no need to
refer to the always speaking doctrine.
216. My
conclusion is a gas cavity
was not a ‘storage tank’ in the meaning of the
legislation and therefore the
cavities
did not fall into List C item 28.
List C- Item 22 - Alteration of land to install plant or machinery?
217. The other relevant item in List C was no. 22:
22. The alteration of land for the purposes only of installing plant or machinery.
218. Both parties were agreed that leaching was an alteration of land; I have found that de-brining was also an alteration to the land.
219. So the question is whether the leaching and de-brining were for the purpose only of installing plant. There was no suggestion they were for the purpose of installing machinery.
220. The
appellant’s position was that the cavities
were plant; so the work to create
the
cavities
was work to install them. I have ruled that the
cavities
were not
plant, but putting that on one side and assuming that they were, HMRC say that
it is a misuse of language to say that the land was altered for the purposes of
installing plant. The alterations did not install the
cavities:
the
leaching created the
cavities
and the de-brining exchanged their contents for
other contents.
221. The appellant relied on SSE Generation where the judge said:
[78]….the answer to the question revolves around the meaning of the word “installing” and in particular whether it extends to include installation by the creation in situ of the asset in question, in addition to installation by putting in place something which previously existed, albeit perhaps only in component form (as in the case of installation of a pipeline.
[79] The OED relevantly defines ‘install’ as ‘to place (an apparatus, a system of ventilation, lighting hearing, or the like) in position for service or use’. This does not take matters much further. I consider the matter finely balanced, but standing back and looking at the matter realistically, the end result of the appellant’s operations was to create in the appropriate place an item of plant (the aqueduct) which was an important element of the overall Scheme where previously they had only been solid rock. Looked at in that way, I consider that alteration of land involved in the creation of the aqueduct to have been carried out for the purpose only of installing the aqueduct.
222. However, I
am unable to agree with Judge’s conclusion. ‘Install’ carries the implication
that something pre-existing is put in position. Creating a space where
previously there was none does not install the space. It creates it but it
does not install it. And contrary to what the appellant says, I do not
consider that either the dry dock or swimming pool were installed
(respectively) in Barclay Curle or Beach. In each case, the item
of plant was created in situ. If the cavity
was an item of plant, the leaching
resulted in its creation; it did not install it in the natural meaning of the
word. The de-brining created a
cavity
suitable for gas storage but it did not
install such a
cavity.
223. Ms Nathan referred to the Court of Appeal decision in Engineering Industry Training Board v Foster Wheeler john Brown Boilers Ltd where it was said:
[‘installation’] conveys putting in place something already made so that it can be used. There may be an element of assembly required; but basically a thing installed is ready to work when it is put in its place, and, if necessary, connected up. ….Installation seems to me to be very far from the reality of the facts, ….It think it is truly construction.
In that case, lots of different components of a very
large boiler were pre-manufactured and brought to site and the boiler was
assembled in situ. It was found not to be installed. This fortifies my view
that creating the cavities
is not the same as installing them. Something could
be installed only after it was created.
224. Judge Poole’s analysis in SSE Generation appeared to be one which relied on analogy in the sense that creating an aqueduct was of similar effect to installing an aqueduct, which may or may not be correct, but I have already said that I think HMRC are right to say that List C was not meant to be extended by analogy.
225. In
conclusion, even if I had found the cavities
to be plant, I would be unable to
accept that they were installed.
226. I
suggested in the hearing that, as it was accepted by HMRC that cushion gas was
plant, it might be possible to say that the cavities
were created for the
purpose of installing the cushion gas. However, I accept that Ms Nathan was
right to say that my point did not assist the appellants because they would have
to show that the
cavities
were created
….‘for the purposes only of installing plant …’
and it is clear that the cavities
were not created only
for ‘installing’ the cushion gas (even presupposing it is right to say that the
cushion gas was installed). And that is because the
cavities
were actually
created to store working gas (stock in trade). While they had to be first
filled with cushion gas to make them stable, the reason they were created was
to allow storage of working gas. The land was not altered by the leaching and
de-brining for the purpose only of installing plant.
227. My
conclusion is that the works to create the cavities
do not fall within item 22
of List C.
Overall conclusion
228. My overall
conclusion is that the appeal fails for two distinct reasons. Firstly, I have
found for the reasons given that the cavities
were not plant; secondly, I have
found, for the reasons given, that even if the
cavities were plant, they were
excluded from allowances by s 22(1)(a) and were not saved by List C.
Right to apply for permission to appeal
229. This document contains full findings of fact and reasons for the decision. Any party dissatisfied with this decision has a right to apply for permission to appeal against it pursuant to Rule 39 of the Tribunal Procedure (First-tier Tribunal) (Tax Chamber) Rules 2009. The application must be received by this Tribunal not later than 56 days after this decision is sent to that party. The parties are referred to “Guidance to accompany a Decision from the First-tier Tribunal (Tax Chamber)” which accompanies and forms part of this decision notice.
Barbara Mosedale
TRIBUNAL JUDGE
Release date: 1 August 2019