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Cite as: [2003] UKSC SPC00376, [2003] UKSC SPC376

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M Freeman (Plant) Ltd v HM Inspector of Taxes [2003] UKSC SPC00376 (11 August 2003)

CAPITAL ALLOWANCES - first year allowances - expenditure incurred by parent company on the provision of machinery and plant - machinery and plant used by subsidiary company who paid the parent company an annual charge - annual charge a proportion of the charges made by the subsidiary to its customers - whether expenditure by parent company was on the provision of machinery or plant "for leasing" - yes - appeal dismissed - CAA 1990 Ss 22 (6B) (d)

THE SPECIAL COMMISSIONERS

M F FREEMAN (PLANT) LIMITED Appellant

- and -

A N JOWETT

(H M INSPECTOR OF TAXES) Respondents

Special Commissioner: DR A N BRICE

Sitting in public in London on 11 June 2003

Graham Wildin FCA, of Messrs Wildin & Co Chartered Accountants, for the Appellant

The Respondent in person

© CROWN COPYRIGHT 2003

DECISION

The appeal

seq level0 \h \r0 seq level1 \h \r0 seq level2 \h \r0 seq level3 \h \r0 seq level4 \h \r0 seq level5 \h \r0 seq level6 \h \r0 seq level7 \h \r0 seq level0 \*arabic. M F Freeman (Plant) Limited (the Appellant) appeals against an assessment to corporation tax for the year ending on 31 March 1999 and amendments to self-assessment for the years ending on 31 March 2000 and 31 March 2001.

seq level0 \*arabic. In each of those years the Appellant claimed first year allowances for machinery and plant but the claims were refused because the Inland Revenue were of the view that the expenditure was on the provision of machinery or plant for leasing.

The legislation

seq level0 \*arabic. At the relevant time the legislation about capital allowances was contained in the Capital Allowances Act 1990 (the 1990 Act). Part II (sections 22 to 83) contained the provisions relating to machinery and plant. Section 22 contained the provisions relating to first year allowances and the relevant parts provided:

"(1) Subject to the provisions of this Part, where-

(a) a person carrying on a trade incurs capital expenditure to which this section applies on the provision of machinery or plant wholly and exclusively for the purposes of the trade, and

(b) in consequence of his incurring the expenditure, the machinery or plant belongs to him at some time during the chargeable period related to the incurring of the expenditure,

there shall be made to him for that period an allowance ("a first-year allowance") which, in the case of expenditure to which this section applies by virtue only of subsection (3B) or (3D) below, shall be of an amount equal to 40% of that expenditure … and, in any other case, shall be of an amount equal to the whole of that expenditure."

seq level0 \*arabic. Section 22(3D) came into effect for chargeable periods ending on or after 2 July 1998. In the year 1998-1999 section 22(3D) provided that section 22 applied to expenditure incurred by a small company or a small business in the period beginning with 2 July 1998 and ending with 2 July 1999. In the year 1999-2000 section 22(3D) provided that section 22 applied to expenditure incurred by a small company or a small business in the period beginning with 2 July 1998 and ending with 1 July 2000. In the year 2000-2001 section 22(3D) provided that section 22 applied to expenditure incurred by a small or medium-sized enterprise on or after 2 July 1998. It was not disputed that the Appellant came within section 22(3D).

seq level0 \*arabic. Section 22(6B) provided:

"(6B) No first-year allowance shall be made in respect of any expenditure to which this section applies by virtue only of … subsection (3D) … above- …

(d) if the expenditure is expenditure on the provision of machinery or plant for leasing, whether in the course of a trade or otherwise. …

and section 50(2) shall apply for the interpretation of paragraph (d) above as it applies for the interpretation of Chapter V of this Part."

Section 50 was the interpretation section for Chapter V (leased assets and inexpensive cars) and section 50(2) provided:

"(2) For the purposes of this Chapter, letting a ship on charter or any other asset on hire shall be regarded as leasing if, apart from this subsection, it would not be so regarded."

The issue

seq level0 \*arabic. The Inland Revenue accepted that the Appellant was carrying on a trade within the meaning of section 22(1)(a); that the Appellant had incurred expenditure on the provision of machinery and plant within the meaning of section 22(1)(a); that the machinery and plant belonged to the Appellant within the meaning of section 22(1)(b); and that the claimed expenditure was incurred after 2 July 1998 within the meaning of section 22(3D).

seq level0 \*arabic. However, the Inland Revenue argued that the expenditure had been on the provision of machinery or plant for leasing within the meaning of section 22(6B)(d) and so no first year allowance could be made in respect of such expenditure. The Appellant argued that the expenditure had not been on the provision of machinery or plant for leasing because the machinery or plant was lent only to another group company.

seq level0 \*arabic. Thus the issue for determination in the appeal was whether the expenditure had been on the provision of machinery or plant "for leasing" within the meaning of section 22(6B)(d).

The evidence

seq level0 \*arabic. There was a statement of agreed facts. In addition, the Appellant produced a small bundle of documents and the Inland Revenue produced another small bundle.

The facts

seq level0 \*arabic. From the evidence before me I find the following facts.

seq level0 \*arabic. The Appellant was incorporated on 19 October 1987 and is a private limited company. During the relevant time the owners of shares in the Appellant, and the proportion of shares held, were:

M F Freeman 25%

J M Freeman 24%

L Freeman 17%

Trustees of R Freeman 17%

R Bennett 17%

seq level0 \*arabic. The Appellant owns all the shares in M F Freeman Limited and all the shares in M F Freeman (Reclamation) Limited (Reclamation). There is also an unincorporated partnership of the two directors of the Appellant, namely M F Freeman and J F Freeman (the partnership). I received no evidence about the activities of the partnership save that it operated in a way similar to M F Freeman Limited.

seq level0 \*arabic. The Appellant owns freehold properties and major items of machinery and plant. Its financial statements state that its principal activity is "plant and machinery hire for the construction industry" (1999) or "hiring out plant and machinery to the construction industry"(2000). Its directors are M F Freeman and J F Freeman. The Appellant's financial statements for the year 2000 showed sales of £412,450. Note 10 stated that the Appellant hired most of its plant and machinery to its subsidiary company, M F Freeman Limited, and that in total that amounted to £405,000 in the year. Note 9 to the financial statements of M F Freeman Limited for the year 2000 stated that the company incurred hire charges from the Appellant to a total of £405,000 during the year.

seq level0 \*arabic. The Appellant does not normally trade directly with any other business but its assets (including the machinery and plant) are used by M F Freeman Limited for the work carried out by that company. The machinery and plant are not used by any other company.

seq level0 \*arabic. M F Freeman Limited undertakes construction work. It constructs buildings itself and also does contract work (for example, excavations for foundations) for other companies. All the building and contracting work of the group is carried out by M F Freeman Limited. Most of the work done by M F Freeman Limited is done on a contract price basis under which customers are charged an overall price which includes the use of the machinery or plant. However, sometimes a client might be charged an hourly or daily rate which also includes the use of the machinery or plant.

seq level0 \*arabic. Each year the Appellant makes a charge to M F Freeman Limited for the use by M F Freeman Limited of the machinery or plant owned by the Appellant. The annual charge is a proportion of the charges made by M F Freeman Limited to its customers. I saw an invoice dated 30 March 1999 from the Appellant to M F Freeman Limited for "plant and machinery hire to 31 March 1999" for the sum of £415,000.

Reclamation was incorporated in order to own a landfill site where surplus building materials were deposited. The site licence has now expired and Reclamation has ceased to trade.

All three companies are based in the Forest of Dean in Gloucestershire and local people refer to all the businesses as "M F Freeman's".

The arguments for the Appellant

For the Appellant Mr Wildin argued that section 22(6B)(d) dealt with the purpose of the purchase of the machinery and plant which had to be "for leasing". If an asset was not purchased for leasing, but was in fact leased, that would not preclude the allowance. In this appeal the machinery and plant were purchased to be used within the M F Freeman group of companies and were not purchased "for leasing". Although the group structure meant that the machinery and plant were held by the Appellant as the holding company, and that the work was actually carried out by M F Freeman Limited, the expenditure by the Appellant was not on machinery or plant "for leasing". The arrangements between the Appellant and M F Freeman Limited did not have the normal characteristics of leasing or hire because: there was no defined lease or hire period; there was no charge to M F Freeman Limited if the machinery or plant were not used; there was no rate agreed in advance for the leasing or hire; and M F Freeman Limited was not responsible for damage to the machinery or plant although a lessee normally would be. Mr Wildin also suggested that there could be a joint venture arrangement between the Appellant and M F Freeman Limited as all the customers regarded all three companies as one and there was only one charge made by the Appellant at the end of each year. There was no hire as such, only the joint use of the assets of the Appellant; both the Appellant and M F Freeman Limited supplied a service to customers.

The arguments of the Inland Revenue

For the Inland Revenue Mr Jowett argued that, although the Appellant purchased and owned the machinery and plant, it was hired to M F Freeman Limited who used it in its business. The expenditure by the Appellant therefore was expenditure on the provision of machinery and plant for leasing and so first year allowances were not available. All the returns of the Appellant were in respect of its trade of hiring plant. The Appellant had no other trade. However, even if that were not the Appellant's trade, then section 61 of the 1990 Act provided that where machinery or plant was first let otherwise than in the course of a trade the capital expenditure should be treated as incurred by the lessor in providing the machinery or plant for the purposes of a trade. Finally, Mr Jowett argued that section 22(1) gave first year allowances to "a person" and there was no provision for a group claim. He cited Henriksen v Grafton Hotel Limited 24 TC 453 at 460.

Reasons for decision

seq level0 \*arabic. The issue for determination in the appeal is whether the expenditure by the Appellant was "expenditure on the provision of machinery or plant for leasing" within the meaning of section 22(6B)(d).

seq level0 \*arabic. The facts as found point to only one conclusion and that is that the Appellant purchased and owned machinery and plant for the only purpose of making it available to M F Freeman Limited in return for reward which took the form of an annual charge. The financial statements of the Appellant state that its activities are "the hiring out of plant and machinery to the construction industry" and that is what the Appellant did. It let its plant and machinery on hire to M F Freeman Limited which operated in the construction industry. Under section 50(2) that is leasing.

seq level0 \*arabic. Turning to the arguments of Mr Wildin, section 22(1) provides that the first year allowance is only available to "a person" and, within the context of section 22, there are no provisions which allow the activities of one entity to be treated as the activities of another member of a group. From the evidence before me of the financial statements I find that the arrangements between the Appellant and M F Freeman Limited were not for any defined period but continued from year to year. I also find that, although the amount of the annual charge was not agreed in advance, the way in which the charge would be calculated was agreed. There was no evidence before me about who was responsible for damage to the plant and machinery. However, none of these factors alters the conclusion that the arrangements between the Appellant and M F Freeman Limited were the letting on hire. Mr Wildin suggested the possibility of a joint venture arrangement but there was no evidence before me to support that suggestion. The financial statements of both the Appellant and M F Freeman Limited do support the conclusion that the machinery and plant was hired by the Appellant to M F Freeman Limited.

Decision

seq level0 \*arabic. My decision on the issue for determination in the appeal is that the expenditure was on the provision of machinery or plant for leasing within the meaning of section 22(6B)(d). Accordingly, no first year allowance is available,

seq level0 \*arabic. That means that the appeal must be dismissed.

DR NUALA BRICE

SPECIAL COMMISSIONER

SC 3036/2003

08.03