The dispute centred around the definitions of the words "tunnel" and "aqueduct". SSE construction of the Glendoe hydro-electric power station included large sections of water conduits and underground channels. SSE claimed capital allowances on its capital expenditure in constructing the conduits and channels to collect and move water around the plant, which HMRC assessed as "excessive".
The result should provide a boost to the clean energy sector and encourage, or at least reassure those making, capital investment on large-scale projects. The case also demonstrates HMRC's efforts to restrict expenditure that qualifies for capital allowances regime, which was not supported by the Supreme Court.
The regime
In simple terms, capital allowances are tax-permitted depreciation, and operate to reduce the amount of a taxpayer's profits subject to tax.
Section 22 of the Capital Allowances Act 2001 ("CAA") excludes expenditure on a "tunnel, bridge, viaduct, aqueduct, embankment or cutting" from qualifying for capital allowances. If HMRC were correct in identifying the items as either a tunnel or an aqueduct, SSE would have been prevented from claiming capital allowances on expenditure of circa £200 million on the construction of the conduits and channels, unless certain exceptions at section 23 CAA could be relied on.
Section 23 CAA allows expenditure on specific items including, the "provision of pipelines or underground ducts or tunnels with a primary purpose of carrying utility conduits."
Definition of "tunnel"
The First-tier Tribunal, the Upper Tribunal and the Court of Appeal all agreed that the definition of "tunnel" should be interpreted narrowly (apologies to any claustrophobia sufferers) and that the purpose of the tunnel should be for transportation. The Supreme Court agreed that the context of the word was all important and the use of the word "tunnel" in the legislation, along with other items related to transportation (bridges, viaducts, embankments, cuttings) was indicative of the intention behind the drafting of the legislation. The Supreme Court agreed with the Court of Appeal's definition of a tunnel in the context of the CAA as being "a subterranean passage for a way to pass through".
Definition of "aqueduct"
HMRC's appeal also sought to extend the definition of the word "aqueduct" as widely as possible. The First-tier Tribunal had agreed with HMRC in this interpretation and held that an "aqueduct" is "an artificial underground conduit whose function is solely to transport water from one place to another through the ground under the force of gravity".
The Upper Tribunal and Court of Appeal disagreed and ruled that an aqueduct for these purposes was a bridge like structure that carried a canal and its meaning was again closely linked to transportation.
The Supreme Court however thought the term "aqueduct" was not limited to structures carrying a canal but was influenced by the legislation's use of the words "bridge" and "viaduct". Therefore, the Supreme Court held that an "aqueduct" for the purposes of section 22 CA 2001 was limited to "a bridge-like structure for carrying water". This meant that the items at the Glendoe plant in dispute were not caught by the exclusions in section 22 CAA and qualified for capital allowances.
Interpretation generally
While HMRC had argued that where different definitions of the same word are identified, the wider definition should be used and that therefore the Court of Appeal erred in adopting narrow interpretations of the disputed words, the Supreme Court dismissed this argument stating:
"In this case the Court of Appeal identified two possible ordinary meanings of both the words “tunnel” and “aqueduct”, not one such meaning. Where there are two ordinary meanings there is no reason for making an a priori assumption that the wider meaning should be taken… Where there are two possible ordinary meanings of the relevant words some means needs to be found to decide which was the meaning intended. There is nothing wrong in principle in relying upon a thematic connection which explains the grouping of items in a list. That is an important part of the statutory context."
Why it matters
Although the decision may seem to be narrow and focused on definitions of two specific words, the Supreme Court's general approach to the interpretation of exclusions will bring comfort to many claiming capital allowances. It also provides guidance as to how the courts should interpret the definitions in the legislation and capital allowances advisors should be aware that the context of the words matter and words cannot be viewed in isolation.
This is a sensible decision, the outcome of which has wider significance to many businesses including those providing new infrastructure for cleaner and renewable energy in the fight against climate change. The capital allowances regime can be hugely beneficial to businesses and is intended to encourage capital expenditure and investment. HMRC's efforts to interpret exclusions widely and allowable items narrowly appears to contradict Parliament's intentions and this decision is a boost to those businesses seeking to claim capital allowances and will hopefully encourage investment in large scale projects such as the Glendoe plant.
If you have any questions in respect of the capital allowances regime, the UK Tax team at DWF has a wide range of experience and knowledge in this area and would be happy to assist.
(1) Commissioners for His Majesty’s Revenue and Customs v SSE Generation Ltd [2023] UKSC 17
