Establishing the primary function of an asset can be hugely important.
The distinction between plant and building is an important one from a tax perspective. When made incorrectly, it will have a significant tax cost in either lost or incorrectly claimed capital allowances.
The basic approach to arrive at a correct classification is to consider the primary and predominant function of the asset – is it mainly a place within which the business is carried out (building) or ‘a tool’ with which the business carries out its activities (plant)?
These questions should be asked in the context of the specific activity the business carries out, since the same asset may be plant in one business but premises in another.
The meaning of the word ‘plant’ can be very broad. Boundaries on its meaning are imposed by ss 22 and 23 of the Capital Allowances Act 2001 – a prescriptive piece of legislation assigning specific assets to lists (see below) where capital allowances apply or are denied. Despite this, a correct classification of assets as plant or otherwise remains a challenging area, with HMRC favouring and often being criticised for limitative interpretations.
Assets with a storage function appear to be particularly challenging, as they often have the characteristics of both a plant (capital allowances apply) and a structure (capital allowances do not apply).
In Cheshire Cavity Storage 1 Ltd and EDF Energy (Gas Storage Hole House) Ltd (TC7301), the first tribunal dealt with the classification of a storage asset of that nature.
The companies involved have been in the business of operating gas storage facilities. Over the years the companies carried out multi-million pound preparation work of the underground gas storage reservoirs to make them suitable for gas storage, as well as built and installed a pipe network and machinery needed for the transport of gas for distribution. Whilst the cost of pipework, dehydration equipment and control mechanisms qualified for capital allowances as plant, the work done to the storage cavities themselves was a contentious matter.
The tribunal considered what the main business was – the companies were in the business of storing gas and not in the business of processing or distributing gas, despite processing and distribution being part of their business.
Factors such as location of the reservoir as part of land (installed underground) was not enough to consider it as premises. The fact that the cavities were central to the business was not a determining factor for either a plant or a building classification.
The matter central to FTT’s ruling was the main function of the gas cavities and the following observations were made in relation to function:
the gas storage cavities could not be described as pumps, although they were capable of performing this function as a substitute for pumps; this function, however, was incidental to manner of their construction, and not the reason they were constructed that way
the main function was to store gas and preserve it in a suitable condition and therefore more than just a tank. The judges took into account the degree to which the asset performed that function as being central to the argument. It was indicated that ‘a plant-like function does not necessarily make premises plant in circumstances where the premises also function as premises’. To decide which function was primary as opposed to secondary the judges took into account the purpose for which the gas cavities were created, as well as the degree to which they performed that function. Some past cases were drawn on:
the water tower in Margrettv The Lowestoft Water and Gas Company (1935) 19 TC 481 was used to store water, but its purpose was to increase pressure
the silo in the case of Schofield  STC 353 was used to store grain, but had the purpose of discharging the grain at speed, for the business was one of distribution not storage.
In Cheshire Cavity Storage 1 Ltd and EDF Energy the purpose of the cavities was to store gas, so as to profit from price fluctuations.
The tribunal examined the legislation to see if any of any of the exemptions would apply, but found that they did not. Let’s take a closer look at why.
Primary function: storage, rather than extraction
Undertakings for extraction, production, processing or distribution of gas do qualify for capital allowances – this is one of the exemptions from the normal restrictions of capital allowances which s 22 imposes on structures (list B, item 7(b) at s 22). However, here, the ‘significant and predominant’ function of the cavities was the premises-like function of shelter and containment, rather than ‘extraction, production, processing or distribution of gas’.
Alteration of land for the purposes of installing plant or machinery
‘Alteration of land for the purposes of installing plant or machinery’ does qualify for capital allowances. However, here, whilst the land was being altered, this was to create a gas storage, rather than install it (to install something it has to already exist). Again, this exemption did not apply.
S23, List C, only applies to specific assets listed there
The tribunal agreed with HMRC that list C which provides a complete list of assets, and should not be applied to other assets by functional analogy. It confirmed that it is not possible to argue that another asset is included in list C (and therefore capital allowances apply to it) because it has the same function as one that is specifically included in list C.
Here, the tribunal determined that the cavities were not tanks (which are included at item 28 of list C), therefore, it was not possible to argue that the cavities were exempted from statutory restriction by analogy to such tanks.
The case was borderline between qualifying or not for capital allowances. It will be interesting to see if the companies appeal and whether further light will be shed on this notoriously grey area.
s 22 CAA 2001 (List B) – structures and buildings not qualifying for capital allowances
s 23 CAA 2001 (List C) – plant qualifying for capital allowances, subject to restrictions
For changes to the capital allowances regime applying to industrial buildings and structures, view these previous In Practice articles: