Gunfleet Sands Limited & Ors v The Commissioners for HMRC

In deciding whether we agree with the parties that the FTT erred, and if so what the correct approach is, it is convenient to start with the primary source of case-law for the FTT’s test: Barclay Curle.

As mentioned above, Barclay Curle, as well as dealing with the disputed issue of what constituted the plant, also raised a further second issue that even if the dock or concrete work were plant, the cost of excavating it did not qualify. Lord Reid and Lord Guest reasoned as follows:

Lord Reid (at 680D) said:

“So the question is whether, if the dock is plant, the cost of making room for it is expenditure on the provision of the plant for the purpose of the trade of the dock owner. In my view, this can include more than the cost of the plant itself because plant cannot be said to have been provided for the purposes of the trade until it is installed: until then it is of no use for the purposes of the trade. This plant, the dock, could not even be made until the necessary excavating had been done. All the commissioners say in refusing this part of the claim is that this expenditure was too remote from the provision of the dry dock. There, I think, they misdirected themselves. If the cost of the provision of plant can include more than the cost of the plant itself, I do not see how expenditure, which must be incurred before the plant can be provided, can be too remote.”

Lord Guest said at 686F:

“The commissioners …view [was] that the expenditure was 'too remote' from the provision of the dry dock. In my view, they were wrong in excluding this expenditure. The excavation was a necessary preliminary to the construction of the dry dock and, in my view, was covered by the provision of plant under section 279. 'Provision' must cover something more than the actual supply. In this case it includes the excavation of the hole in which the concrete is laid."

It is unrealistic, in my view, to consider the concrete work in isolation from the rest of the drydock. It is the level of the bottom of the basin in conjunction with the river level which enables the function of dry docking to be performed by the use of dock gates, valves and pumps. To effect this purpose excavation and concrete work were necessary.”

He also said later:

“The excavation was a necessary preliminary to the construction of the dry dock and in my view, was covered by the provision of plant under section 279. 'Provision' must cover something more than the actual supply. In this case it includes the excavation of the hole in which the concrete is laid."

Lord Donovan also agreed the excavation costs qualified noting that:

“Similar expenditure incurred in relation to a building or structure is now regarded as " expenditure on the construction " of such building or structure for the purposes of section 265 (1) without any further or more express provision, and I think rightly so…”

Lord Upjohn (who had dissented on the first issue of whether the dock was plant) agreed with Lord Reid’s reasoning on the second point. Lord Hodson who similarly had dissented on the first issue did not express a view on the second.

The FTT explained Barclay Curle’s support for the test of necessity in the following terms at [121]:

“Barclay Curle…authority for the proposition, derived from the extracts from the judgment of Lord Reid and Lord Guest which are set out above [these appear at [112] and [113] above], that expenditure which must be incurred before plant can be provided is not too remote. It qualifies for allowances as being “on the provision of” the plant. The word “must” in Lord Reid’s judgment chimes with the word “necessary” in Lord Guest’s judgment.”

HMRC disagree that the House of Lords was saying any expenditure that had to necessarily be incurred before the plant could be provided qualified. The FTT and taxpayers were wrong to read “before” in Lord Reid’s speech as referring to “what must be done before there is a provision”. That was different to expenditure incurred on provision. All Lord Reid was saying, HMRC submit, was that on the facts of that case there was not an actual provision without the plant being installed or transported. Similarly, HMRC submit, Lord Guest was not advancing a necessity test. The hole below water level was an integral part of the plant – it was in that sense of constructing the plant (which included the concrete lined basin) that the excavation and concrete work were considered “necessary”. This was also how the House of Lords read the case in Ben-Odeco – see [128] below. The taxpayers argue the House of Lords was saying that such expenditure would qualify, but it was not saying that that was the only way expenditure could qualify.

We agree with both parties’ submissions that the House of Lords was not expressing any general requirement of necessity, certainly in the way the FTT understood it. However, we prefer HMRC’s interpretation, in essence for the reasons Ms Wilson, advanced, that the House of Lords was not saying that anything that had to be done before a provision of plant could take place qualified. We thus disagree with the taxpayers’ interpretation that the House of Lords was simply confirming that necessary expenditure incurred before provision could take place should not be excluded.

The House of Lords’ reasoning, in our view, must be reconciled with the particular statutory words that were being construed (“on the provision of plant”) and the particular nature of the plant in question there – a basin that was excavated below sea level. The House of Lords made clear that the provision of plant could include more than the supply and the purchase price, but Lord Reid’s reasoning is instructive insofar as it clarified the reason the installation of plant was covered. That was because, without the excavation, the plant could not be said to have been provided. As Ms Wilson put it, the provision of the plant was inchoate or incomplete.

In summary therefore, Barclay Curle does not impose a necessity test but makes the point that “provision of plant” may cover more than the cost of plant itself or its actual supply. It can also cover expenditure on installing the plant on the basis that without installation the plant cannot be said to have been provided for the purposes of the trade.

Ben-Odeco was a decision of the House of Lords which concerned whether finance costs and commitment fees the taxpayer had to incur for it to finance the construction of plant in the form of oil rigs for its oil rig hire trade were “on the provision of” plant. The House of Lords dismissed the taxpayers’ appeal (Lord Salmon dissenting) holding that the expenditure was not incurred on the provision of the oil rig.

The taxpayer’s arguments included that the statutory words included all items of expenditure properly incurred in the provision of the oil rig (which would include the cost of financing the payment for it) whereas the Revenue argued the only expenditure on the provision of the oil rig was in effect on its price, the fees and interest being on the money to pay for it.

Lord Wilberforce discussed various authorities. In contrasting the different legislation relevant to a Commonwealth authority, he said this about the UK legislation:

“…I bear in mind that it arose under a different statute and one which not only uses a different expression, but whose policy as regards deductions seems to be more liberal than the U.K. statute. The expression " capital cost to the taxpayer " makes it easier to include within deductible expenditure costs which the particular taxpayer incurs, whereas the U.K. words, more objectively, focus on expenditure directly related to the plant. The one draws a line round the taxpayer and the plant; the other confines the limiting curve to the plant itself.”

The authorities not being of decisive assistance he moved on, at 1098B to discuss:

“An important principle of the laws of taxation… that, in the absence of clear contrary direction, taxpayers in, objectively, similar situations should receive similar tax treatment…”.

He noted different results would follow depending on the means by which the plant was paid for e.g. debenture vs shareholder funding and whether interest on borrowing could be capitalised. He acknowledged “If the law is that it offers the taxpayer these options, he is of course entitled to select that which suits him best” continuing “but an interpretation which introduces such a large element of subjectivity is to be avoided.”

Concluding the appeal should be dismissed, he explained (1098 D-F):

“The words 'expenditure on the provision of' does not appear to me to be designed for this purpose. They focus attention on the plant and the expenditure on the plant", so that is the word "on” not limiting it necessarily to the bare purchase price, but including such items as transport and installation in any event not extending to expenditure more remote in purpose. In the end the issue remains whether it is correct to say that the interest and commitment fees are expenditure on the provision of money to be used on the provision of plant, but not expenditure on the provision of plant...."

Lord Hailsham (1100A-B) rejected any analogy with Barclay Curle on describing it as a case:

“which decided that the excavation of the necessary basin for the construction of a dry dock was physically part of the same operation, and ranked for allowance as part of the expenditure on the provision of the dry dock itself.”

He continued:

At (1099F), noting the parties’ respective arguments he acknowledged the statutory words could bear either construction but preferred “decisively” (1100E) the narrower construction advanced by the Revenue that had been accepted below by the Special Commissioners and Brightman J below in the High Court. His reasoning included his view that the taxpayer’s contention did not conform to the policy of the statute without that giving rise to abuse, the similar point Lord Wilberforce had raised that taxpayers should be treated the same irrespective of their means of funding, and that the expenditure was on the provision of money not plant which he explained as follows (at 1100F ):

Lord Russell dismissed the appeal on the basis of similar points regarding the similar treatment of taxpayers irrespective of their funding means noting (at 1105H):

Lord Russell also considered the taxpayer’s argument regarding a disparity in treatment between the situation where the person providing the plant had incorporated finance costs into the price of the plant (which would qualify) and the non-qualification of their financing costs if their argument were not accepted. He rejected that argument as follows (1106B):

“That is so: but I do not follow the conclusion from that fact. It does not appear to me to be an alternative to borrowing by the purchaser. The supplier's price would reflect the whole cost to him of supplying the plant, including overheads, interest on necessary borrowing, or on commitment of working capital, and a profit element, the whole price being subject to a perhaps competitive market. I am not able to see how the build-up of the supplier's price can have any relevance to the problem raised in this appeal.”

He went on similarly to dismiss the appeal on the basis that the provision was of finance not plant (1106G ):

“In my view the question to be asked is, what is the effect of particular capital expenditure? Is it the provision of finance to the taxpayer, or is it the provision of plant to the taxpayer? In my opinion the effect of the expenditure was the provision of finance and not the provision of plant. I would add that I do not seek to confine qualifying capital expenditure to the price paid to the supplier of the plant. I should have thought, for example, that if the cost of transport from the supplier to the place of user is directly borne by the taxpayer it would be expenditure on the provision of plant for the purposes of the taxpayer's trade. And there may well be other examples of expenditure, additional to the price paid to the supplier, which would qualify on similar grounds. But such matters are not for decision in this appeal.”

Lord Salmon dissenting considered, in agreement with Lord Hailsham, that both meanings were possible but that the Revenue’s narrow construction, favoured by the majority, was not in accordance with the policy or objective of the statute of incentivising undertakings to provide themselves with new and efficient plant and machinery and where it must have been generally recognised new plant was often acquired with borrowed money.

Two clear themes emerge in the majority’s reasoning. First the need to avoid an interpretation which entails subjectivity thereby wrongly treating taxpayers, in similar circumstances from the point of view of the legislation, differently. The question of subjectivity is less relevant on the facts here – there is no suggestion that the taxpayers are incurring expenditure because of their particular circumstances that other taxpayers in a similar position would not incur. The second theme, which is more fundamental to the issues in this case, is the importance of asking what the effect of the expenditure is. In other words is it on the provision of plant or something else?

In agreement with HMRC, a closer analysis of Ben Odeco also reveals the different sense in which the “directly-related” test the FTT seized on was used (see [124] above). Mr Jones submitted, that test correctly reflected what Lord Wilberforce said. However, as Ms Wilson highlighted, the context was a contrast between a more widely worded Canadian authority which concerned plant and taxpayer whereas the UK legislation was concerned just with plant. Ms Wilson rightly points out the term “directly-related” is a gloss on “on”. (Mr Jones makes the point that HMRC’s own manuals refer to “directly related” but the answer to that is that to the extent those seek to gloss the legislation that would equally be unwarranted).

The fact that “directly-related” represents an unsupported gloss on “on” is consistent with Ms Wilson’s submissions on the statutory language Parliament has chosen. We agree with HMRC that “on” does not mean “in connection with” or “directly related to” but signals a closer connection.

As regards the interpretation of “provision”, it is helpful to note Brightman J’s judgment [1978] STC 111 (pg120 d-h) where he noted the analogous term used in relation to relief in the Capital Allowance Act for buildings and structures was “construction”. Brightman J thought that if it were accepted Parliament did not intend to have a different code for buildings and structure on the one hand, and machinery and plant on the other, the reasonable conclusion was that the two formulations were intended to comprise the same type of expenditure. The buildings and structure provision referred to “capital expenditure on the construction of a building or structure” (he explained it would have been inelegant to use that same wording in relation to the provision of machinery and that it would be a little strange to refer to expenditure on the provision of a building or structure). He had difficulty believing interest on borrowed money “could aptly be described as part of the expenditure on the “construction” of a building or structure”. This reason, while not specifically endorsed was not disapproved of in the House of Lords, resonates with the use of the term “construction” in Lord Hailsham’s speech in that case and the similar comparison Lord Donovan made in Barclay Curle (see [129] and [115] above). While not determinative, it serves as a useful guide to test out whether the relevant expenditure would make sense under the term “construction”. The clear sense that also comes across from that comparison is a focus on “doing” and “making” rather than advice on doing and making.

At a high level we would agree with Mr Jones’ summary that Barclay Curle and Ben Odeco are landmarks in this area which cast light on, but do not define the parameters of, “on the provision of plant and machinery”. Insofar as they both mention expenditure beyond the purchase price and transport and installation, neither case closes the door in principle to other types of expenditure. But the significance of Ben-Odeco is not in the parameters but the approach it indicates, and in our view, the narrowness of the sorts of expenditure contemplated by the words.

We can summarise the principles from Barclay Curle and Ben Odeco of relevance to this appeal as follows:

As discussed, Barclay Curle does not establish a test of necessity. A whole host of expenditure may be necessary before a taxpayer is in a position to provide plant, but, as the reasoning in Ben-Odeco illustrates, that does not make such expenditure “on the provision of plant”.

The narrowness of the test and centrality of the plant is also consistent with Henderson LJ’s summary in Urenco of the authorities (he referred to Barclay Curle and Ben-Odeco as the leading authorities) when he contrasted the facts of Urenco with:

“…examples given in authorities of parasitical expenditure which qualifies for allowances because it is incurred in installing an item of plant or otherwise enabling it to function.”

The result of the above in real terms is a strict and narrow application of the statutory words.The taxpayers rely on various other authorities to show in essence a wider test. We do not agree they do.

Inmarsat Global Ltd v HMRC [2022] EWCA Civ 1076 concerned the extent to which the taxpayer was entitled to capital allowances on satellite launch costs incurred by an international organisation whose satellite launch trade the taxpayer had taken over. The taxpayers rely on a statement in the reasoning in an obiter section of the judgment (at [66]) which concerned whether the satellite launch costs were “on the provision of” plant where the Court of Appeal said: “To give rise to capital allowances, expenditure must facilitate the ‘provision’ of machinery or plant…”. Mr Jones emphasises the breadth and openness of the term “facilitate”.

We consider however this argument wrongly seizes on a term used by way of explanation for a different point and elevates it to the status of a legislative term which it is not. We agree with HMRC that the reference to “facilitate” must be read in the context of the Court of Appeal’s rejection of HMRC’s argument that the expenditure had to be on something “leading towards ownership”. The focus was on the provision of the plant and that could cover installation costs directed towards ownership. The extract relied upon followed the Court of Appeal’s mention of Lord Wilberforce’s explanation in Ben-Odeco that the legislation confined the “limiting curve to the plant itself” and Barclay Curle which had referred to the costs of installation without which the plant would be of no use for the purposes of the trade. There was no suggestion the term “facilitate” was intended to gloss what was said in those House of Lords authorities, thereby expanding the scope of the provision.

Mr Jones also submitted that the launch costs which were thought to be qualifying must have included considerable planning costs to get the satellite into orbit. While it would be reasonable to assume considerable planning was involved, we do not know whether such costs were encapsulated in the launch costs and, even if they were, the authoritative value of that would be limited as the point not being in issue did not even feature in the Court’s reasoning.

Samarkand Film Partnership No. 3 & Ors v HMRC [2011] UKFTT 610 (TC) was a film scheme case where the issues included the question of whether the relevant expenditure was “incurred on the acquisition of the film” under s130 ITTOIA and whether, having concluded it was capital expenditure, it could be revenue by virtue of s134 which applied to “expenditure on the acquisition of the asset”. In respect of that latter formulation the FTT drew an analogy with s11 CAA and referred to Lord Russell’s explanation of the meaning of “on” in the following passage:–

“[393] We note that s 134 is not confined to expenditure ‘on the asset’ but applies to expenditure ‘on the acquisition’ of the asset. The natural meaning of that is to include costs directly related to the acquisition.

[394] If we apply Lord Russell’s test: ‘what was the effect of the expenditure?’, in relation to the cost of negotiating and preparing the agreements, it seems to us that the answer is not that the effect was the production of a piece of paper, but was the acquisition of an asset.

[395] For this reason we find that expenditure on the negotiation and drafting of the agreement to acquire the films (but not their leasing) would be expenditure on the acquisition of films, and thus deemed to be a revenue nature by s 134.”

Mr Jones highlights that the costs of paying lawyers to negotiate a contract for acquisition was not the purchase price of the film, but one step removed from the cost of acquisition; but it was nevertheless considered part of the acquisition cost. The FTT’s reasoning also held at [395] that advice on what to buy qualified despite the test being that the costs were “on [in that case the “acquisition”]”. The case showed “on” included things which were directly related to “the acquisition”. Similarly, “on” included things directly related to the provision of plant such as costs of negotiating contracts for acquisition of the plant and for obtaining advice as to the plant to be acquired.

We agree with HMRC’s submissions however that the reasoning relied on does not assist. This section of the FTT’s reasoning was based on the hypothesis (which the FTT had found to be incorrect) that the relevant partnership was trading, the nature of that question and the particular trade carried on being fact-sensitive. We also do not consider one can necessarily read across the term “acquisition” vis à vis legal costs to “provision”.

More generally Mr Jones submits the approach of asking – “is it on provision of plant or is it on something else” is not a useful analytical tool. Almost every situation can be described as on the provision of something else. For instance, in addition to the example of the cost of the negotiating of the purchase of plant with the manufacturer (expenditure which HMRC do not challenge) Mr Jones gave the example of Inmarsat where one could pose the question of whether the expenditure on the satellite launch was on rocket fuel rather than satellite installation or transport. However, the approach of considering whether the provision is not on plant but something else is very much part of the analysis of asking what the effect of the expenditure is and is the approach adopted by the majority in Ben-Odeco. The fact expenditure which is accepted to be on the provision of plant can potentially be described as on the provision of something else does not undermine the utility of the approach. If the provision on the “something else” sounds too much of a stretch to be correct, then the answer will rightly incline towards “provision on plant” (as we think it does in the rocket fuel example but is not so clear with the contract negotiation example).

As to HMRC’s submission that the FTT’s analysis on “necessary design” failed to properly address the remoteness inherent in the test of “on the provision of” plant, we would agree with the taxpayers, at the level of principle, that remoteness as an analytical tool does not really add anything insofar as it is just a conclusion that something is not “on the provision of plant”. It is also difficult to discern a consistent recourse to the concept of remoteness in the cases and, although it features in some of the argument and reasoning, it does not appear instrumental. In the High Court in Ben Odeco remoteness was put forward by the taxpayer as reassurance that the taxpayer’s interpretation was not too open ended (and Brightman J was sceptical it would function that way).In the House of Lords, Lord Wilberforce considered the words did not “extend to expenditure more remote in purpose” (1098E-F - see above [127]) (Lord Salmon also mentioned remoteness as one of the reasons why the feared abuse would not arise 1104G).

In broad terms we do not consider remoteness has quite the significance HMRC’s submissions place on it, but would agree that to the extent it does feature in the analysis, the point at which something is adjudged too remote is not interpreted generously: while excavation costs of a hole in order to construct a dry dock basin pass muster, finance costs which were necessarily incurred in order to purchase plant did not. To the extent there is a line which needs to be drawn along a spectrum of remoteness the authorities do not suggest the marker should be placed at the more generous end. While Mr Jones is right to say their Lordships in Barclay Curle were dismissive of the Revenue’s remoteness arguments, that was because on the facts the excavation was viewed as anything but remote.

Ms Parry also made some submissions on remoteness in terms of the timing of the expenditure, some of the expenditure having been incurred many years in advance of installation of the plant, but in the end she acknowledged, correctly in our view, that such timing could not be determinative. While it was argued to be relevant, we consider it takes on an even more diminished role in our view under an interpretation where “on provision of plant” covers the making/construction of the plant, transportation of the plant and its installation. The fact some element of construction might take many years or precede the completion of the plant by many years – a not uncommon occurrence in large scale infrastructure projects – would not be any bar, in principle, to including those costs. To the extent HMRC’s point is about lack of certainty, at the time the expenditure was incurred that there would be plant, we do not see the legislation requires one to take a snapshot of the state of affairs at the point in time the expenditure was incurred. On the facts of this case, there is no dispute that the plant (the generation assets – but the point would stand equally if the plant were the turbines and array cables) did come into existence. It would be extremely counter-intuitive to say some of the plant provision cost that was nearer in time to completion would qualify but that the expenditure earlier on in the project that went just as much to making the plant would not.

As to installation, the FTT developed its test of safe effective installation under the guise of a requirement of necessity. It follows from our analysis above that there was no reason to develop such test.

Although the taxpayers challenge the FTT’s overall test of necessity, they submit the FTT was right to hold the expenditure on installation which qualified included expenditure on ensuring the installation was safe and effective.

The relevance of installation is that expenditure on it is capable of being qualifying pursuant to the authorities. This is on the basis that installation of the plant may be regarded as part of providing the plant. Mr Jones’ submissions acknowledged this but submitted the Court of Appeal’s thoughts (at [165] to [167]) on the meaning of the term in Urenco by reference to HMRC v SSE Generation Ltd [2021] EWCA Civ 105were relevant. (Those concerned Item 22 List C in s23 where “installation” was specifically referred to, but Mr Jones submits it is nevertheless of relevance because List C was acknowledged to be derived mainly from case-law). The Court of Appeal (Henderson LJ) in Urenco did not express a concluded view on the scope of the term “installation” in List C but agreed with the UT’s views on the term, which included that “installation” was “apt to describe a process of integrating one thing into another, and not the construction or manufacture of an asset before it is installed”. Mr Jones submits that the idea of process (which he summarised as a series of steps), where one is talking about a complex project will also involve the planning required to make those steps happen and those costs can properly be described as costs of the installation process. We consider, however, that represents an unwarranted extrapolation of what was meant by “process”. The process referred to the physical activity of integration of one thing into another in contradistinction to manufacture of the plant or the act of putting a completed item of plant into place. There is no reason to suppose that physical process encompassed the intellectual effort entailed in planning and advising on how and when the installation activity should be carried out.

We also reject Mr Jones’ submission that to disqualify the costs of ensuring safe and effective installation would mean only allowing expenditure on unsafe and ineffective installation, which clearly could not be right. The one does not obviously follow from the other. There is clearly however no prohibition on expenditure on safe and effective installation. The point is that the costs of ensuring safe and effective installation are not the installation activity itself. In particular, advice on how and when to install in the circumstances of a complex project might be necessary for the safe and effective installation of the plant but it is advice which puts the taxpayer in the position of being able to install the plant, not expenditure on the provision of plant (in the form of installation of the plant).

Mr Jones’ further submission is that HMRC’s stance sits oddly with its acceptance that expenditure on the contract negotiation for installation vessels qualifies. However, that is not a finding which is challenged and HMRC’s acceptance of that expenditure, or, as a wider point its consistency with HMRC’s guidance, is not something we consider should guide the legal interpretation of the relevant words. In conclusion on this point, we consider the FTT’s test incorrectly expanded the judicial acknowledgement that installation could be encompassed within “on provision of”, when there was no separate test for installation and the focus should have remained on whether the words “on the provision of” were satisfied.

With the above general principles in mind, we now turn to a central issue here: whether expenditure on design costs and on studies gathering data to input into such design qualify. The taxpayer’s basic proposition is that with a bespoke item of plant, it has to be designed and fabricated before it can be provided. This can be seen most clearly with the unique wind turbine foundation which needed information from the metocean and geophysical and geotechnical studies in order to be manufactured.

As a starting point we note, that as with the question of installation, there is nothing to suggest there is any special rule for design. The question is always whether the expenditure is “on the provision of plant”.

It is also important to acknowledge that design is a relatively broad term that can be understood in a variety of senses. The FTT recognised this when it said at [121] that design was a “weasel word” and then outlined two senses: a bespoke design, giving the tailor made wind turbine foundations as an example, or in a broader sense identifying the type of turbine or features it should bear.

In the context of design of plant or machinery we consider the above contrasts the two senses as between the process of design and the design as an end product made real in substance. The design process may be thought of as the process by which any of number of decisions including size, dimensions, material composition, component type, fabrication method are made, so as to come up with a set of instructions which can then be used to make or construct the plant. Those design decisions will be informed by the desired function of the plant and an evaluation of data. The end product of plant may well be described as bespoke or tailor-made design. The instructions used to make that plant may also be described as designs.

The design costs in respect of which relief is sought are those arising in relation to the process and the data gathering to inform the design process. That can be an “iterative process”, as explained in relation to the way in which the foundations and wind turbines are designed above (see [85(3)]).

The taxpayers based their argument that design costs qualify on the logic from Barclay Curle that the plant cannot be made without that step being taken and therefore cannot be too remote. But that is another way of saying design is necessary for one to have plant and we have already explained in our interpretation of Barclay Curle and at [119] to [121] above why that is wrong. It does not follow that something, such as design, which is required to put the taxpayer in the position to provide plant is the provision of the plant. The reasoning, that without the design there would be no plant is also inconsistent with approach in Ben-Odeco, where even though the financing was essential to the provision of the plant that did not then mean the finance cost qualified. As set out in Ben-Odeco one must ask what is the effect of the expenditure? We agree with Ms Wilson’s submission here: the effect of the expenditure is to create designs which put one in the position to provide plant. Provision of plant is what happens when those designs are then turned into the plant.

We also consider that the clear sense from the authorities is that plant, and the provision of it, appears at the centre of the basis for deduction. To provide plant assumes that there is already some notion of the plant in respect of which provision of it becomes relevant. As we have explained, provision is focussed on the cost of doing, making or constructing. The intellectual effort which goes into the design process may be instrumental to conceiving of what the plant, that is to be made or constructed is, but it appears odd to refer to the design of the plant (which is something which happens when the final form and shape of the plant is still to be determined) as the provision of the plant (which assumes the plant is final such that it can be provided).

The process of design is obviously not installation or transport, but nor is it analogous, in our view, to those categories. It is not something which is required to make the plant function for the purpose of the trade because the plant in question has already been conceived of and designed. It is in essence advice on how to make the plant.

We can also test this result using the approach Brightman J mentioned in Ben Odeco by seeing whether the activity, here design, makes sense under the terminology of construction. While the design process is a pre-cursor to construction, we consider it would be odd to refer to the intellectual activity of designing a building as the physical process of constructing it.

We accept that very many items of plant (though not all, the horse in the seminal case of Yarmouth v France perhaps being a good example) will incorporate some element of design process, which design may well be priced into the amount paid if the plant were simply bought by a taxpayer. That will qualify with no stripping out of the design costs. At the level of policy, we recognise the taxpayers’ point that this gives rise to a disparity in treatment, without an obvious policy justification, between expenditure on design activities incorporated into a sale price, and those which are undertaken by the taxpayer (which will be a common feature in large scale projects involving bespoke plant). But as explained by Lord Russell’s reasoning in Ben Odeco, that disparity is built into the nature of the test. It is simply a function of the words Parliament has chosen to circumscribe the relief. It should also be recognised that in the straightforward situation where an off the shelf item of plant is acquired no such disparity arises.

As regards expenditure on generating data inputs for design it follows that, whether or not the gathering of data inputs is viewed as part of the design process or something separate to it, expenditure on data gathering will also not qualify.

In further support of the taxpayers’ case, Mr Jones relies on McVeigh (HMIT) v Arthur Sanderson Sons Ltd [1969] 2 All ER 771 as authority for the proposition that design costs qualified as “on the provision of plant”. The case concerned a wallpaper manufacturer seeking relief for expenditure on the cost of designs by free-lance and in-house artists, filed in a library, from which the business chose a selection to pattern the wooden blocks and rollers to print the wallpaper. The High Court held, on the basis of the relevant authority at the time which held that a lawyer’s law library was not plant, that the designs were not themselves plant. (Cross J indicated he did not agree with the authority and said he could not see as a matter of principle why the designs should not qualify as plant). The further question was whether the expenditure was on the provision of plant (being the wooden blocks, screens and rollers). Cross J noted the legislation “isolated the provision of the patterned wooden block and pose[d] the question: What did the taxpayer company spend on it?” Dismissing the Revenue’s appeal, Cross J said “To my mind it cannot be right to include nothing for the cost of the design”. Mr Jones argues this case tells us costs of design of plant are expenditure on provision of plant – if that were not so, the answer would have had to be the opposite of what Cross J decided in that case.

We agree with HMRC (and the FTT who found the case to be of limited assistance) that this authority did not, and cannot be taken to, lay down a general proposition that design costs of plant are “on the provision” of it. The case was simply saying that production of patterns that were used to make patterned blocks to make and sell patterned wall papers was on the provision of plant (the wooden blocks). Although the case refers to “design” the specific (and different) sense in which that term arose is relevant. The designs (patterns) were used to complete the plant (i.e. the wooden block) not to design the wooden block. The designs (i.e. the patterns drawn by the artists) were part of making the wooden block function as a wallpaper patterning block (the Revenue had conceded the blocks would be “inchoate plant” without the patterns on them).

As Ms Wilson explained, the authority (Daphne v Shaw (1926) 11 TC 258) which stood in the way of finding the patterns were plant themselves has since been overturned by the Court of Appeal in Munby v Furlong (1977) 50 TC 491, so Cross J was deciding the question on a premise which would now not be correct.

To the extent the case is taken to set down a general proposition then we would respectfully disagree with it. The decision was a function of the constraints the High Court felt under by the authority at the time which prevented it from holding the designs were themselves plant. There was no specific reasoning given for the High Court’s conclusion. As a matter of principle it is inconsistent with what we have said above about expenditure which puts the taxpayer in the position to provide plant as opposed to the activity of providing it. It is also inconsistent with the proposition that the provision of plant assumes the plant in respect of which provision is made has already been conceived of.

In conclusion, it does not follow that expenditure on design costs (in the sense described above as the intellectual effort for the production of instructions by which the plant can be made), or the costs of inputs into such design will be “on provision of plant” just because without such design or inputs the plant could not be fabricated. The question remains: are the relevant costs “on the provision of plant”?.

It follows from the above analysis that there were a number of errors of approach in the FTT Decision.

Although HMRC do not challenge the project management preliminaries it says the FTT erred in double-counting. We reject that for the reasons the taxpayers outline. The legislation simply looks at whether the sum is “on the provision of” plant and if it is then it qualifies. To the extent HMRC’s point is about the same expenditure being claimed twice then that is an issue of evidence which was not relevant to the FTT’s decision (which was expressed to be one of principle).

The above errors were errors in relation to approach and clearly material. We consider that in relation to Issue 2, the FTT Decision should be set aside to the extent, but only to the extent, it is challenged on appeal. Given there is no challenge to the findings of fact (beyond the question of plant) that the FTT set out comprehensively, we consider we should remake the decision ourselves rather than incur the additional time and expense of remittal to the FTT.

Our remade decision on Issue 2 deals only with the points the parties have challenged. Where the outcome of our decision in relation to a given set of expenditure coincides with the decision the FTT reached, we will set out our own reasoning.

In summary, the application of the strict and narrow principle encapsulated in the legislation, means that design of plant and the data inputs to that design, do not constitute provision of plant and that at (even at the level of generation assets – i.e. the level favourable to taxpayer and against HMRC’s case) none of the disputed environmental impact or other technical studies qualify as “on provision of plant”.None of the studies were provision of the plant (the generation assets), in that expenditure on them was not expenditure on the actual making or construction of the plant, its actual installation, or actual transport of it. Nor were they expenditure of a similar nature.

That is true even of the “high water mark” of the taxpayers’ case: the metocean detailed studies. The information from this fed into the design of the unique foundations. However, the studies were not provision of plant because they were inputs to design and even if the studies were design themselves that was not the provision of plant but provision of design which put the taxpayers in the position of providing plant. The expenditure on provision of the plant was the expenditure on making the foundations further to the design, and the costs in installation of them.

We have also considered whether any element of the studies meets the threshold for counting as “installation” but conclude in summary that the studies, insofar as they concerned installation, constituted advice on where, how or when to install but were not the actual installation of the plant. There was some debate at the hearing about the nature of the work for establishing where unexploded bombs were and whether that work qualified. This was not simply generic advice that bomb locations should be avoided but included surveys undertaken which identified the precise geographic locations of ordinance. That was obviously necessary information to make sure the turbines and cables were installed safely. However even those studies and surveys were not in our view installation, they were preparatory work that needed to take place before installation could take place. The installation cost which fell under provision were the actual costs of installing the turbines and cables comprising the generation assets.

The result, that none of the environmental and technical studies qualify also reflects the answer given to the question per the approach in Ben Odeco whether the studies are on provision of plant or on something else. Our specific reasoning on the particular studies is set out below:

The taxpayers argued, in the alternative, that even if the expenditure was not “on the provision of plant and machinery” then it was revenue in nature (since there was no other relevant capital asset to which it could properly be attached). The relief for pre-commencement trading expenditure under s61 CTA 2009 was therefore available. In brief, that provision allows expenses incurred for the purposes of the trade incurred up to 7 years before the start date to be deducted if “in calculating the profits of the trade” a deduction would have been allowed for them if they had been incurred at the start date of the trade. However, s53(1) CTA 2009 provides that “in calculating the profits of a trade” no deduction is allowed “for items of a capital nature”.

The FTT rejected the taxpayers’ argument as a “logical fallacy”. It did not follow that if expenditure was not within “the highly specific wording that appears in the capital allowances legislation” (i.e. “on provision of plant or machinery”) that that then meant the expenditure could not nevertheless be of a capital nature. The FTT had held at [224] that “it was clear…that the expenditure on the studies [was] on or in respect of assets which [were] capital in nature…”.

The taxpayers appeal that conclusion. If the expenditure was not incurred on the provision of a windfarm or any of its component parts that expenditure could not be “incurred on providing or enhancing any other asset or in creating any other enduring benefit” (the formulation used by the House of Lords in British Insulated and Helsby Cables Ltd v Atherton [1926] AC 205 at 206 per Viscount Cave LC). It was also the case that expenditure could be on a capital asset yet still be revenue, for instance expenditure on maintaining a capital asset. HMRC say the FTT’s analysis was correct, and the expenditure was capital being part of the set-up costs which resulted in capital infrastructure and suitable premises.

We consider the FTT was right to reject the taxpayers’ case. It was open to find that the expenditure was not “on the provision of plant or machinery” yet still conclude the expenditure was capital in nature. The House of Lords decision in Tucker (HMIT) v Granada Mortorway Services Ltd. [1979] 1 WLR (Lord Wilberforce) explained how indicia to capital or revenue could point different ways and that previous authority had warned against applying formulae derived on one case to another. HMRC are right to point out that the division between revenue and capital expenditure turns on its own test which is different to the “on the provision of plant or machinery” test in s11(4) CAA. While the term “test” does not quite capture the approach by which an answer is reached to the capital vs revenue question. the key point is that the questions and ensuing analysis in respect of each are different. Items can, as Ms Wilson submitted, clearly be capital (for instance the interest costs on financing of the oil rig in Ben Odeco, which were capitalised), but still not meet the “on the provision of” test. We accordingly dismiss the taxpayers’ appeal on Issue 4.

To put these issues in context it is important to note the basic structure of the capital allowances regime. Our decision so far has been addressing whether the taxpayers satisfy the general conditions as to availability of plant and machinery allowances which are available if a person carries on a qualifying activity and incurs qualifying expenditure. A depreciation allowance ("the writing down allowance”) is calculated as a specified percentage of the qualifying expenditure. The taxpayer may claim the writing down allowance in whole or in part. The qualifying expenditure pool is then reduced each year by the writing down allowances claimed by the taxpayer.

The issues at the heart of the dispute between the parties to which we now turn arise from the fact that the closure notices issued to Gunfleet Sands Limited, Gunfleet Sands II Limited and Walney (UK) Offshore Windfarms Limited (“the Issue 6 Appellants”) incorrectly deducted amounts of expenditure which HMRC did not accept as qualifying from the writing down allowance figures claimed by those taxpayers and did not reduce the qualifying expenditure amounts. To take the example of Walney, the aggregate qualifying expenditure of £15,576,689 (rather than the writing down allowance on that expenditure of £3,012,532) was deducted from the writing down allowances figure and the qualifying expenditure figure was not amended. The taxpayers say that the tribunal has no power to adjust the amounts of qualifying expenditure given the terms of the FTT’s jurisdiction and the qualifying expenditure figure in the companies’ tax returns cannot be altered now as a result of provisions contained in Schedule 18 Finance Act 1998 (“Schedule 18”) setting out the operation of the self-assessment regime.

The FTT decided that:

In essence, the Issue 6 Appellants maintain that s.50 TMA applies only to the amendment appealed, i.e. the writing down allowances and not the qualifying expenditure. As the qualifying expenditure was not amended by HMRC in the closure notices issued to the Issue 6 Appellants (“the Closure Notices”) that figure cannot be changed by the FTT. In addition, the amounts of qualifying expenditure are to be treated as having been conclusively determined for the purposes of Schedule 18 as that is not an amount which has been appealed.

The FTT decided that in amending the writing down allowances in the Issue 6 Appellants’ returns HMRC made a simple transcriptional error. Considering the correspondence between HMRC and those companies it was found to be inconceivable that a reasonable recipient would have thought that the amendments restricted the closure notices in the way they claimed. The recipient would have concluded that there was a simple secretarial error. In considering the correspondence, the FTT made findings (at [226] of the Decision) that:

Further detailed findings regarding the content of the Closure Notices were made by the FTT at [232] – [235] of the Decision. In those paragraphs the FTT found that the reasonable recipient of the Closure Notices which referred to the 3 August 2017 email would have concluded that they deal with the quantum and categories of expense. In particular, the FTT took into account that the 3 August 2017 email referred to the basic question as being “is the expenditure related to the plant and machinery”. The FTT then explained how the email went on to identify stages in the process of constructing an offshore wind farm and set out HMRC’s view that expenditure incurred at certain stages was too remote to qualify for allowances. HMRC requested numerical information for periods before and after the design and layout of the turbines. Information was submitted on a without prejudice basis to the Appellants’ contention that none of it was too remote and all of it qualified for allowances. The FTT noted that HMRC then amended the writing down allowances rather than the qualifying expenditure and said that:

“in light of the foregoing correspondence, it is inconceivable that the reasonable recipient would have thought those amendments restricted the ambit of the closure notices in the way suggested by the appellants… The recipient would have concluded that HMRC had simply made a secretarial error.”

Having recognised the nature of the error in amending the writing down allowances the FTT recognised, as Mr Jones had submitted, that the error had real consequences and that it was necessary for HMRC to identify a specific statutory provision giving statutory power to adjust the amendments pursuant to s50 TMA.

The FTT relied upon the case of R (Archer) v HMRC [2018] STC 38 to conclude that amended self assessments are self assessments within the ambit of s50 TMA such that the amendments themselves fell within the scope of s. 50 TMA.

In addition, the Issue 6 Appellants have argued that the provisions contained in paragraph 88 of Schedule 18 (“Paragraph 88”) mean that the amount of qualifying expenditure was “conclusively determined” such that it could “no longer be altered”. The FTT disagreed, deciding that the fact that an appeal had been brought which had not been finally determined meant that under the provisions contained in Paragraph 88 the amount of qualifying expenditure was not one which “could no longer be altered”. (In other words, the qualifying expenditure amount could be altered). The FTT took comfort from this conclusion being in accordance with the venerable principle that the taxpayer should pay the right amount of tax.

Schedule 18 sets out the self assessment provisions dealing with company tax returns, assessments and related matters including enquiries by HMRC into a company’s tax returns.

HMRC is empowered to enquire into a company’s tax return. Such an enquiry is then concluded by the issue of a closure notice, as provided for by paragraph 32(1) of Schedule 18:

“An enquiry is completed when [HMRC] by notice (a “closure notice”) inform the company that they have completed their enquiry and state their conclusions.”

Paragraph 34 of Schedule 18 sets out the requirements where a closure notice is issued:

Section 117 FA 1998 makes clear that claims for capital allowances are dealt with by the provisions contained in Schedule 18 but the appeal provisions contained in Part V TMA continue to apply, albeit with Schedule 18 effectively incorporated into the TMA:

“Corporation tax self-assessment

117 Company tax returns, assessments and related matters

(1)

The provisions of Schedule 18 to this Act have effect in place of—

(a)

the provisions of Parts II and IV of the Taxes Management Act 1970 (returns, assessment and claims), so far as they relate to corporation tax,

(b)

certain related provisions of Part X of that Act (penalties), and

(c)

Schedule 17A to the Taxes Act 1988 (group relief: claims),

and also make provision in relation to claims for allowances under the Capital Allowances Act.

(2)

Schedule 18 to this Act, the Taxes Management Act 1970 and the Tax Acts shall be construed and have effect as if that Schedule were contained in that Act.”

An appeal against a closure notice is brought within the jurisdictional provisions of the TMA by s.48 TMA which provides that:

“(1)

In the following provisions of this part of this Act, unless the context otherwise requires-

(a)

"appeal" means any appeal under the Taxes Acts;…

…(2) In the case of,

(a)

an appeal other than an appeal against an assessment, the following provisions of this Part of this Act shall, in their application to the appeal, have effect subject to any necessary modifications.”

The “Part of this Act” referred to therein is Part V. The provisions in Part V proceed to set out the procedure which arises including the ability of the taxpayer to seek a review of the appealed matter and for HMRC to offer to review it. Once a taxpayer has given a notice of appeal to HMRC, the taxpayer may notify the tribunal of the appeal under s49D (or in the case of a review, under s49G TMA).

Section 49D TMA (and s49G) provide that the tribunal is then to “decide the matter in question”. Section 49I provides that ““the matter in question” means “the matter to which an appeal relates”.”

The tribunal’s power to increase assessments and self-assessment where considered to be undercharging the taxpayer, or to reduce the assessments or self-assessments where considered to be overcharging the taxpayer is set out in s50 TMA (which is also within Part V). Section 50(7) provides that:

“If, on an appeal notified to the tribunal, the tribunal decides:

a)

that the appellant is undercharged to tax by a self-assessment …the assessment shall be increased accordingly.”

Paragraph 7 of Schedule 18 to FA 1998 provides that “Every company tax return for an accounting period must include an assessment (a “self assessment”) of the amount of tax which is payable by the company for that period.”. This reflected the fact that with the introduction of self assessment the taxpayer was now required to self assess the amount of tax payable. Paragraph 8 proceeds to set the steps which must be taken to calculate the amount of tax payable for an accounting period.

Paragraph 88 states:

“(1)

This paragraph applies to an amount stated in a company tax return for an accounting period which is required to be included in the return and which affects or may affect—

(a)

the tax payable by the company making the return for another accounting period, or

(b)

the tax liability of another company for any accounting period.

(2)

If such an amount can no longer be altered it is taken to be conclusively determined for the purposes of the Corporation Tax Acts in relation to that other period or other company.

(3)

An amount is regarded as one that can no longer be altered if—

(a)

the period specified in paragraph 15(4) (general period for amendment by company) has ended,

(b)

any enquiry into the return has been completed (or is completed so far as relating to the matters to which the amount relates by the issue of a partial closure notice),

(c)

if an officer of Revenue and Customs amends the return under paragraph 34, the period within which an appeal may be brought against that amendment has ended, and

(d)

if an appeal is brought, the appeal has been finally determined.”

The Issue 6 Appellants do not challenge the FTT’s findings of fact on Issues 5 and 6, but rely on two lines of argument challenging the FTT’s application of the law: the FTT’s jurisdiction and the interpretation of the provisions setting out when an amount in a return can no longer be altered.

In relation to the FTT’s jurisdiction, Mr Jones submits that the provisions of paragraph 34(3) of Schedule 18 say that the recipient of a closure notice is given the right to appeal against an amendment of its return. That appeal of the amendment (as opposed to some wider matter such as the return overall), once notified to the FTT, engages the FTT’s jurisdiction to determine “the matter in question” in accordance with s49G(4) TMA. The jurisdiction of the FTT is fixed and defined by the terms of the closure notice as confirmed by Daarasp LLP & Anor v HMRC [2021] UKUT 87 (TCC) at [25(7)]. Mr Jones relies in particular on the description of the FTT’s jurisdiction in the judgement of Lady Justice Rose in the Court of Appeal case of Investec Asset Finance Plc v HMRC [2020] STC 193 at [70] to say that it is the amendment appealed (and that alone) which sets the boundaries of the FTT’s jurisdiction. That paragraph reflects the drafting of the TMA. When s50 TMA is read together with s48 TMA the result is that, in an appeal against an amendment made by a closure notice issued under paragraph 34 of Schedule 18, s50 TMA applies to “the amendment” under appeal. No other part of the tax legislation confers upon the FTT power to amend a different part of the return.

Furthermore, regard must be had to paragraph 88 of Schedule 18 which governs when amounts stated in a company’s tax return are conclusively determined. Paragraph 88(3) sets out when the amounts of qualifying expenditure “can no longer be altered” and consequently conclusively determined. In this case the Closure Notices did not make any amendment to the qualifying expenditure included therein. Consequently, the amounts of qualifying expenditure can no longer be altered as the time for amending the returns has expired, the enquiries into the returns have been completed, and whilst there was an amendment to the returns, that amendment was not of the amounts of qualifying expenditure set out therein. In other words, the unamended amounts are now conclusively determined.

Ms Wilson submitted that the issues should be addressed in the context of the overall company return and self-assessment framework. Taxpayer companies can be required under paragraph 3 Schedule 18 to deliver a return and paragraph 7 requires that every company tax return must include a self-assessment of the amount of tax payable by the company for the relevant period. The provisions in s48 TMA dealing with appeals envisage appeals other than an appeal against an assessment, but in this case the appeal made under paragraph 34(3) FA 1998 was of each company’s return which in turn included the self-assessment made by each company. The decision in Archer makes clear (albeit in a different context of an individual self-assessment) that an amended self-assessment is still a variety of self-assessment even where HMRC makes the amendment. Alternatively, if it was concluded that Archer should be distinguished given its different context, the provisions contained in s48(2)(a) should apply. Ms Wilson submitted that if “assessment” was too narrowly construed then the Appellants would have no right of appeal under s49D TMA.

Ms Wilson submitted that the scope of an appeal is set in ss49D and 49I by reference to the “matter in question”, which in this context should be read as the conclusions of the Closure Notice. Ms Wilson relied upon the cases of Daarasp and Shinelock Limited v HMRC [2023] UKUT 00107, as well as the judgment of Lady Justice Rose in Investec which those cases apply. In considering Lady Justice Rose’s judgment addressing the scope of closure notice appeal, paragraph 70 of Investec should be read together with paragraphs 71-73.

The result of applying the legislation in the way envisaged in those cases was that the tribunal had jurisdiction under s50 TMA to determine whether or not the Appellants were entitled to treat costs incurred as qualifying expenditure. As a matter of policy, s50 TMA must be applicable in order to give effect to the tribunal’s conclusions in such a case so that the taxpayer does not benefit simply from a transcription error.

From 1 April 2010 paragraph 34 was amended by the insertion of sub-paragraph (2A). That paragraph enables the officer to make any amendments of other company tax returns delivered by the company that are required to give effect to the conclusions stated in the closure notice. That subparagraph can only make sense if the conclusions are something more than the amendments to figures in specific returns and if the analysis proffered by HMRC is correct.

Turning to the Appellants’ submissions regarding paragraph 88 of Schedule 18, Ms Wilson submitted that the tests were cumulative and referenced the ordinary processes involved in the self-assessment culminating in an appeal. So, in the case of Walney, paragraph 88(3)(a) is met because the period in which the company may make an amendment to its return for the period in question has ended. Paragraph 88(3)(b) is met because any enquiry into the return (in this case the one enquiry) has been completed. Paragraph 88(3)(c) is met because an officer amended the return under paragraph 34 and the period for appealing against the amendment has ended. However, paragraph 88(3)(d) is not met because an appeal has been brought and not finally determined. Giving paragraph 88 the narrow construction sought by the Appellants undermines s50 TMA and the venerable principle that taxpayers should pay the right amount of tax.

The provisions contained in paragraph 34(3) of Schedule 18 enable the taxpayer to appeal the amendment made by HMRC. They state that the taxpayer “may appeal” the amendment. We consider that they do no more than that on the face of the drafting. Indeed, it would have been strange for the drafter to say otherwise – the taxpayer will only wish to challenge the amendment or amendments made by HMRC. In providing the ability of the taxpayer to appeal an amendment the provision does not set the parameters of the Tribunal’s jurisdiction which we address after setting out the context of what the issue 6 Appellants themselves said about the nature of their appeals.

In this case the Issue 6 Appellants appealed saying as follows:

“The taxpayers’ self-assessment returns for the relevant accounting periods, as amended pursuant to the closure notices… are incorrect in that they do not allow full relief for such expenditure, expenses and allowances.

The taxpayer’s self-assessment returns for the relevant accounting periods should allow full relief for expenditure, expenses and allowances as set out in the grounds of appeal.”

In the letters of appeal sent to HMRC the companies wrote:

“Please accept this letter as an appeal against all closure notices issued for the periods listed above…We do not consider the adjustments proposed by HMRC are correct as a matter of law. We understand that the adjustments proposed are intended to be consistent with HMRC's technical position as set out in [an e-mail]…, however we do not agree with HMRC's position. Furthermore, we do not consider that the adjustments proposed in the closure notices are in line with the position set out in that e-mail.”

In the detailed grounds of appeal submitted to the tribunal it was specifically identified that the Closure Notices were defective. The Appellants stated that the Closure Notices made no amendment to the amount of qualifying expenditure claimed by each Issue 6 Appellant. To take the example of Walney, it was further stated that “in error, instead of adjusting the amount of qualifying expenditure by £15,576,689 and the amount of writing down allowances for the period by £3,012,532 the Closure Notice adjusted the writing down allowances by £15,576,689 and made no adjustments to the amount of qualifying expenditure.”

The Issue 6 Appellants therefore recognised that the adjustments had been made “in error”. This is not surprising given the background of communications leading up to the Closure Notices and the Notices themselves.

We are therefore clear from the correspondence and the grounds of appeal that, as the FTT found, the taxpayers and HMRC were clear as to what was in dispute: i.e., in essence, their entitlement to capital allowances in relation to expenditure incurred in relation to the wind farms.

However, the terms of an appellant’s appeal do not define the jurisdiction and powers of the tribunal. The tribunal’s powers are found in section 50 TMA. Those powers enable the tribunal to increase an assessment where the taxpayer is found to have been undercharged or reduce an assessment where the taxpayer is found to have been overcharged. The powers can only be exercised by reference to the jurisdiction provided by Parliament to the tribunal in legislation, which in this case is that found in s49G TMA “to decide the matter in question”.

Both Daarasp LLP and anor v HMRC and Shinelock to which we were referred look to the authority of the Court of Appeal decision in Investec, which is where we start in addressing the confines of the “matter in question”.

Lady Justice Rose said at paragraphs 70-73:

Mr Jones sought to persuade us that paragraph 70 should be viewed as the key paragraph setting out the confines applicable to the tribunal’s jurisdiction. However, we consider that, as Ms Wilson submitted, paragraph 70-73 should be read as a whole. It is clear from the heading that paragraphs 70-73 together formed the section of the judgement dealing with the scope of closure notices. Paragraph 73 refers to the FTT determining whether the subject matter being “broader than the particular conclusion and adjustments addressed in the closure notice” (emphasis added) and envisages that that could enable HMRC to put forward different arguments. Also, Mr Jones’ focus on paragraph 70 and the amendment setting the jurisdiction is difficult to reconcile with the Court of Appeal’s application of the relevant legal principles to the facts in that it dismissed the taxpayer’s appeal there. The taxpayer had argued that the amendment HMRC sought was precluded because it was not referred to in the closure notice, nor was it the result of the conclusions set out in the closure notice (see [49]). If Mr Jones were correct and the scope of appeal was circumscribed by the amendment alone, then the Court of Appeal ought to have allowed the appeal on the straightforward basis that the amendment sought by HMRC was not the same one, or even the same kind as the one HMRC had made in the closure notice. Furthermore, our conclusion that the section should be read as a whole is consistent with the decisions of this tribunal in Daarasp and Shinelock to which we now turn.

Consistent with the decision of the Upper Tribunal in Shinelock we adopt the summary of the essential workings of the enquiry and closure notice process set out in Daarasp:

“22.

An enquiry, begun by way of an enquiry notice, is concluded by a closure notice. The closure notice comprises two elements:

(1)

A statement of the officer’s conclusions; and

(2)

A statement of what, if anything, must be done to give effect to those conclusions.

23.

The whole point of tax returns and enquiries into them is to ensure that the public interest in taxpayers paying the correct amount of tax is met. To that end, HMRC must have an appropriate ability to examine the return, but the taxpayer must have a fair opportunity to challenge (by way of appeal) either (i) the conclusions of HMRC or (ii) the manner in which those conclusions have been given effect to (by way of amendments to the return). As can be seen from section 28A of the Taxes Management Act 1970, a closure notice quite clearly contains – and must contain – both elements; equally, as section 31(1)(b) of the same Act provides, an appeal lies against both “any conclusion stated” or any “amendment made”.

24.

It is important to appreciate that the conclusions of a closure notice are distinct from the amendments that may arise out of those conclusions. Obviously, there is a nexus between the two – the amendments implement the conclusions reached – but they are very different things. The conclusions in a closure notice consist of a statement why the taxpayer’s return is incorrect (if it is), whereas the amendments set out how the return must be corrected in order to give effect to those conclusions. A closure notice must state the officer’s conclusions; and having issued a closure notice, HMRC has no power to amend the relevant return other than to give effect to the conclusions: Bristol & West at [24]; Investec at [51].”

We also adopt the principles set out in Daarasp (at para 25) as having been provided by the authorities considering closure notices. In particular, we agree that:

Notably, as emphasised by Lady Justice Rose in Investec, it is for the First-Tier Tribunal to decide what the subject matter of a closure notice is within the bounds described by her.

In this case the FTT concluded that the subject matter of the Closure Notice was: “is the expenditure related to the plant and machinery?” While we would encourage a clear identification specifically of the conclusions of closure notices under appeal (which will be instrumental for the FTT to decide the subject matter of a closure notice where this is a matter of dispute) we are satisfied that the FTT’s reasoning and conclusions are sufficiently clear to say that the conclusion of the Closure Notices should be taken as being set out in the email of 3 August 2017 to which the Closure Notices referred. More specifically the email stated:

“The basic question is “Is the expenditure related to the plant and machinery”. ...

Our conclusion is that a wind farm offshore is constructed at the end of an iterative process.

1.

A piece of seabed is identified, and leased (or more correctly heads of terms) from the Crown Estate for the purpose of building a wind farm

2.

the exact design of the wind farm will be determined after various studies including, but not restricted to, bird studies, seismic studies, seabed studies, strata studies, windspeed studies and wave height studies

3.

once data from all the studies is collected and examined then a decision of what type of turbine (lots of little ones vs. several big ones), what type of foundation and precise locations can be settled-in particular, location cannot be settled until numbers and size identified because of things such as wave heights, shipping lanes etc

4.

planning permission and suchlike are then applied for; using this settled plan of turbines and locations

5.

the site is built and commissioned.

Our view is that expenditure from 1 & 2 are too remote for capital allowances and the expenditure from 4 & 5 are within capital allowances. This leaves the expenditure from 3, which is, we feel the area of doubt. However, we think that the spending that is made before the decision about the number, type and location of specific turbines is still too remote, but once the number, type and location of the turbines are settled then the capital allowances will no longer be “too remote”.”

The e-mail proceeded specifically to set out that initial high level spending would qualify for a revenue deduction and further spending such as that on signing a lease would qualify as capital spending but would not qualify for capital allowances. It was only once the type and location criterion were set that capital allowances would start to be available.

HMRC’s conclusions were therefore clearly set out in the email of 3 August 2017. That email was specifically identified in the Closure Notices.

As stated by us earlier, we do not consider that paragraph 70 of Lady Justice Rose’s judgment should be viewed in isolation. In addition, Lady Justice Rose was contemplating the normal situation where the amendments were consistent with the conclusions of a closure notice. We agree with the Upper Tribunal in Daarasp at [36(4)(c )] that:

“..we must bear in mind that it is perfectly possible for the consequential adjustment in a closure notice itself to be in error, in that it fails to articulate the adjustment required by the conclusion articulated by the officer.”

As the Upper Tribunal decided in Daarasp, the amendment made by the officer needs to be considered, but it does not in itself determine the matter in question where the evidence of a closure notice and its conclusions as understood by the parties in the light of their preceding exchanges casts a different light on the nature of the dispute.

As Lady Justice Rose stated, a narrow confinement of the subject matter of the appeal is not intended to be one of the protections conferred on the taxpayer and in any tax case the venerable principle must be recognised. To accept the Issue 6 Appellants’ arguments in seeking to rely upon the error made by HMRC in the circumstances where their conclusions have been so clearly set out and understood by the taxpayers would fly in the face of the venerable principle.

In this case, the conclusions of the Closure Notices as set out in the 3 August 2017 email and understood in the context of the parties’ history of engagement, set the parameters of “the matter in question” for s49D TMA. The erroneous lack of amendment to the qualifying expenditure figure did not set those parameters. Once the matter in question was identified, the FTT had the powers provided in s50 TMA; i.e. the FTT could decide that the self-assessment figures should be adjusted.

The taxpayers also submit that regardless of the scope of the appeal, s50 TMA does not give the Tribunal the power to amend a part of the return which HMRC has not amended. They emphasise that the appeal is against an amendment (paragraph 34 Schedule 18). Section 48 TMA means that the TMA provisions are modified because the appeal is not against an assessment but a closure notice but the result does not confer a power to amend a part of the return which HMRC did not amend. The argument in essence is thus that even if closure notice conclusions encompass qualifying expenditure, under s50 there is no power to alter that element of return as that part lies outside the self assessment part of the return to which s50 TMA applies. We reject this argument.

Firstly we consider the practical context of what the taxpayers are arguing. When considering the way in fact that a company’s self assessment and return is presented the steps required by paragraph 8 of Schedule 18 are reflected in the tax return’s format and the boxes set out for completion. In carrying out that self assessment those preparing the return draw up calculations supporting the inclusion of figures in the tax return’s boxes. All of that information feeds into and supports the calculation of the self assessment of tax. The calculations include the amounts of qualifying expenditure. It would be wholly artificial and impractical for us to conclude that the only part of the return which can be altered by the Tribunal is that part which falls within the self assessment calculation of the amount of tax payable for the relevant period, particularly when considering the intrinsic interaction between the pool of qualifying expenditure and the writing down allowances available to the taxpayer.

Secondly, we are clear that this situation is a paradigm example of the need for a purposive construction of the legislation. Parliament must have intended the Tribunal’s powers in s50 to align with the scope of the appeal. Otherwise, the situation arises where an appeal could properly proceed about the subject matter (informed by the conclusions of the closure notice as discussed above) only to find the tax payable amount could not be altered because of a limitation in the Tribunal’s powers under s50. This lacuna could affect taxpayers too. A taxpayer who is successful in persuading the Tribunal that HMRC’s closure notice conclusions are wrong on a new argument that they had not factored into their self-assessment might not be able to translate that win into a decrease in tax if HMRC had amended an irrelevant part of the return in error. They would be stuck with the Tribunal only being able to alter the amendment HMRC had incorrectly picked.

That this is not a result intended by Parliament is consistent with the way it has framed the Tribunal’s powers. The words “undercharged to tax by…” in s50 TMA suggest the consideration is not just about correctness of the amounts which HMRC have amended but the impact of those amounts on the tax charged. In the case of a self-assessment the tribunal can amend parts of the return to give effect to its view the self-assessment undercharged (provided those parts of the return are within the scope of the appeal under principles discussed above). As applied to appeals against amendments, similarly the concern is not necessarily restricted to adjusting the given amendment up or down but can extend to those parts of the return which are consequential to the subject matter of the closure notice conclusion. Importantly, the key part of the legislation providing the scope for the purposive construction we consider is required is contained in s48(2)(a) TMA. That section provides that where there is an appeal other than an appeal against an assessment, the TMA appeal provisions have effect “subject to any necessary modifications”. In this case this means that one does not simply substitute the word self-assessment with “amendment”. Instead, the statutory rules are modified to bring them into line with the position for appeals against self-assessments. In doing so the venerable principle is given effect: the Tribunal is given the power to make the consequential amendments required for the taxpayer to pay the right amount of tax. However, for the reasons we have explained above, the modification does not mean that the Tribunal can amend any part of the return; it must be a part of the return which was consequential to the closure notice conclusions as construed by the FTT within the limits discussed above.

We therefore dismiss the Issue 6 Appellants’ appeals as regards the ground that the FTT did not have jurisdiction to adjust the amount of the qualifying expenditure in the companies’ returns.

Finally, we turn to the alternative argument relied upon by the Issue 6 Appellants who submit that paragraph 88 means that their returns can no longer be altered.

Mr Jones’ submissions focus on the fact that paragraph 88 is stated to apply “to an amount stated in a company tax return”. His submissions argue, in effect, that where there is no appeal in relation to an amount in a tax return, that amount must be considered to be conclusively determined even if other amounts in the tax return are disputed. The result of Mr Jones submissions would be to cut across the structure of the tribunal’s jurisdiction which we have described above. For the reasons we now explain, we consider that the wording of paragraph 88(3) does not achieve this. Indeed, to find the contrary would require the clearest language given the clear framework set out by the TMA.

We are satisfied that the paragraph is clearly dealing with the logical order of the self-assessment regime, setting out a series of points in time when an amount can be treated as such that it can no longer be altered. Firstly an amount can no longer be altered if the period for amendment by the taxpayer must have ended. However, where there has been any enquiry into the return that enquiry must have been completed, or, notably, completed so far as relating to the matters to which the amount relates by a partial closure notice. We note that paragraph 88(3)(b) specifically contemplates completion of the enquiry in relation to the amount alone.

Moving forward through the normal progression of assessment and enquiries, where an officer of HMRC amends the return and the period within which an appeal may be brought against the amendment of the return has ended an amount will be conclusively determined. The legislation does not say that it is only the amended amount which is conclusively determined at that point. This makes sense and gives the expected certainty and clarity to both HMRC and the taxpayer.

However, if an appeal is brought, an amount is not conclusively determined until the appeal has been finally determined. Paragraph 88(3)(d) does not refer to an appeal of an amendment to “the amount” and this is consistent with the interpretation of the jurisdiction we have set out above. The taxpayer appeals amendments made to its tax return, but the scope of the appeal is determined by the matter in question and more particularly the conclusions in a closure notice. Until the appeal is finally determined, amounts stated in the taxpayer’s tax return are not conclusively determined, albeit that the only amounts which fall within the FTT’s jurisdiction to amend are those which fall within the conclusions of the closure notice.

We therefore dismiss the Issue 6 Appellants’ appeals as regards the ground that the amount of qualifying expenditure stated in their tax returns had been conclusively determined.

In conclusion HMRC’s appeal is dismissed on Issue 1. The taxpayers’ appeals on Issues 2,4,5 and 6 are dismissed. HMRC’s appeal on Issue 2 is allowed. The FTT decision is set aside and remade to the extent we have set out above at [178] to [182].