Upper Tribunal finds in taxpayer s favour in Ashurst instructed case
17 June 2021
17 June 2021
The Ashurst Tax Team (Alexander Cox, Sara Mardell and Aaron Robertson) advised Mark Shaw (as nominated member of TAL CPT Land Development Partnership LLP ("TAL")) on his successful appeal to the Upper Tribunal from a decision made by HMRC to disallow certain claims for industrial buildings allowances ("IBAs"). The decision of the Upper Tribunal was released on 28 April 2021, and emphatically overturns the First Tier Tribunal's decision in the dispute. HMRC are not appealing the decision to the Court of Appeal.
Ashurst instructed Julian Ghosh QC (One Essex Court) and Emma Pearce (Pump Court Tax) in the matter.
IBAs were available until 2008 (when they were gradually withdrawn before being abolished in 2011) as a form of writing down allowance available on qualifying expenditure, which wrote off the cost of constructing a qualifying industrial building or structure on a straight-line basis, usually over a period of 25 years. Like other capital allowances, when an industrial building was sold or transferred to another person, a balancing adjustment was required to make the allowances claimed match the actual loss suffered. A balancing adjustment could therefore result in a "clawback" of overclaimed IBAs (called a "balancing charge") or further relief being available (a "balancing allowance").
Similarly, if a building ceased to be used, a balancing adjustment was required. Importantly in this case, section 285 of the Capital Allowances Act 2001 ("CAA 2001") provided that a building is not treated as ceasing to be used "merely because it falls temporarily out of use, and if a building is an industrial building immediately before a period of temporary disuse, it is to be treated as being an industrial building during the period of temporary disuse."
TAL acquired certain industrial buildings in a designated enterprise zone in Scotland (the "Buildings") from a Taiwanese company that produced cathode ray television tubes, CPT Limited ("CPT"). CPT had claimed IBAs and TAL went on to claim IBAs, for the periods ended 31 March 2005 to 31 March 2007, on the basis that although the Buildings were not being used at the time of their acquisition by TAL (CPT having ceased to use them following the closure of its business at the site where the Buildings stood) it intended to bring the Buildings back into use by finding suitable tenants to occupy them. Significant evidence was presented to the First Tier Tribunal supporting TAL's intention in that respect. TAL argued that it should be entitled to the allowances on the basis that the buildings were not to be regarded as ceasing to have been used because they were "temporarily out of use" within the meaning of s 285 CAA 2001, up to the point that TAL decided to cease their efforts to use the Buildings and sell them.
HMRC disagreed with TAL and disallowed TAL’s claims on the basis that the Buildings did not meet the definition of "industrial buildings" in the legislation because they were not "temporarily out of use" within the meaning of section 285 CAA 2001, at any time during TAL’s period of ownership. Specifically, TAL had not used the Buildings at all in its period of ownership, and HMRC argued that a period of actual use is required at both ends of a period of temporary disuse (referred to as "book-ending" temporary disuse). In TAL's case, the Buildings never came back into actual use, and therefore the period during which they were not being used could not be considered "temporary". The First Tier Tribunal agreed with HMRC, holding that TAL's intention to bring the Buildings back into use was irrelevant for the purposes of interpreting the term "temporary" in section 285.
The Upper Tribunal disagreed with HMRC that that a period of temporary disuse has to be "book-ended" by two periods of actual use. It identified the key question as being whether (i) section 285 envisages that a period of temporary disuse can be followed by a period of permanent disuse without affecting the status of the earlier period or, (ii) if a period of temporary disuse turns out, as events unfold, to be permanent because of a change of use of the building or another balancing event, such as a sale or destruction of a building, then the earlier period can no longer be regarded as a period of temporary disuse. If the latter were correct, the start of the earlier period of temporary disuse would, with hindsight, become the start of the period of permanent disuse.
The Upper Tribunal preferred (i), the taxpayer's analysis, on the basis that:
On this basis, the Upper Tribunal found the FTT had made the necessary findings of fact for it to conclude that TAL wanted the Buildings to be used as industrial buildings and that intention was evidenced by its marketing efforts and the provisions agreed in the acquisition documents for the Building with CPT (which included an undertaking provided to CPT to bring the Buildings back into use). The Buildings were therefore in a temporary state of disuse such that section 285 applied, until TAL resolved to no longer use them as industrial buildings some time later.
The decision provides a comprehensive analysis of the relevant provisions, and approaches the dispute in the context of the purpose of the legislation rather than by simply considering the use of the word "temporary" in section 285 in the narrowest sense. Such an approach has allowed the Upper Tribunal to properly consider the mechanics of how the IBAs legislation fits together, and therefore accept that intention is key in applying section 285.