Upper Tribunal finds in taxpayer s favour in Ashurst instructed case

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.

Summary and Relevance

• IBAs were designed to encourage capital investment in buildings by providing tax relief in respect of capital expenditure on their construction
• In order to qualify, the buildings had to be used for a qualifying purpose (e.g., for the purposes of a trade)
• The legislation recognised that a building should not be regarded as ceasing to be used for a qualifying purpose when the disuse was only temporary
• In this particular case, the buildings in question were constructed for the manufacture of cathode ray tubes (a qualifying purpose)
• With the development of flat screens, the manufacture of cathode ray tubes became unviable and the owner occupier of the buildings (CPT) sought to let the buildings to a new commercial tenant. It failed to do so. HMRC accepted the buildings were in temporary disuse during this period
• TAL acquired the buildings from CPT in 2004 and inherited for IBA purposes a proportion of the original capital expenditure incurred by CPT on the buildings
• TAL continued to try and let the buildings to new commercial tenants throughout its period of ownership. Ultimately, it was unsuccessful, the site was sold off and the buildings demolished
• TAL maintained that it was entitled to IBAs in respect of its period of ownership on the basis that when it acquired the buildings they were in only temporary disuse and the buildings continued in that state until TAL ceased looking for tenants and recognised that the buildings could not be let and should be demolished
• HMRC maintained that TAL was not entitled to any IBAs because buildings could only be regarded as in temporary disuse if, following a period of disuse, they were actually brought back into use (which the buildings in this case were not)
• The UT agreed with TAL and allowed its appeal against the decision of the FTT
• While the IBA regime has now been withdrawn, the decision is relevant to statutory construction and highlights the importance of understanding the wider background to and purpose of a particular tax regime when construing its legislative provisions, particularly deeming provisions

Background

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.

Decision

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:

• such an interpretation was consistent with the ordinary meaning of the word "temporary", and where, for example, the owner of an unexpectedly vacant building is searching for tenants who will continue to use the building as an industrial building, it is difficult to see how at the outset of that period the period of disuse could be described as anything other than "temporary". This accorded with HMRC's own guidance, where it stated that "The taxpayer must genuinely regard the building as temporarily out of use…."
• including the intentions of the owner of the building was consistent with the purposes of the legislation, which was to encourage particular forms of economic activity by according to industrial buildings or (in relation to buildings in an Enterprise Zone, commercial buildings) advantages not accorded to other business premises. If the owner was clearly undertaking activities to allow the building to be used as an industrial building, that was consistent with the purpose of the legislation and in particular, "Otherwise, there could be a disincentive on owners to make that effort since they could end up suffering a financial disadvantage."
• HMRC’s approach would result in surprising results, and to illustrate this, the Tribunal gave the example of a building that was occupied for qualifying use by a tenant, A. A then vacated the building, and whilst the owner then spent time refurbishing and marketing it, the building was subsequently re-let for qualifying use to tenant B. Both parties agreed that section 285 meant that no balancing event would have occurred for the owner, because of the application of section 285. However, if there was a fire the day before B was due to move in to the building, HMRC's analysis meant that the whole of the period that the property was unoccupied (i.e. between A vacating and the fire) would be treated as permanent disuse. That could not be correct.
• instead, the correct approach to be followed in order to establish whether disuse is temporary is to look at all the relevant circumstances and not only the physical state of the building. This approach would involve objectively establishing why the building is empty and what the owner intends to do with it, by reference to the available evidence. As the Upper Tribunal put it, "The FTT is used to deciding the outcome of appeals on the basis of the taxpayer’s intention. For example, in relation to penalty appeals or discovery assessments it has to ascertain the state of the taxpayer’s mind when considering whether particular actions were "careless" or "deliberate"."

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.

Comment

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.