03/11/2023
Upper Tribunal allows HMRC’s appeal on capital allowances relating to technical study expenditure
The Upper Tribunal has issued a decision, largely in HMRC’s favour, in the capital allowances case Gunfleet Sands Limited & Others v HMRC. The taxpayers generate electricity from windfarms located off the UK coastline, and the dispute principally concerned whether disputed expenditure, incurred on various environmental impact and technical/engineering studies performed as part the process of establishing new windfarms, was qualifying expenditure ‘on the provision of plant or machinery’ for the purposes of section 11 of the Capital Allowances Act 2001. The Upper Tribunal first addressed a preliminary issue on the nature of the underlying plant, with the taxpayers arguing that certain collections of generating assets were to be considered together as single items of plant, and HMRC arguing instead that the assets were each to be considered as individual items of plant in their own right. The Upper Tribunal concluded that, whilst the First-tier Tribunal (FTT) made an error in identifying the relevant case law tests, it was immaterial and ultimately the FTT’s approach led to a finding on this issue (in favour of the taxpayers) that was open to it.
In the main dispute, the FTT had found that some elements of the disputed technical expenditure qualified for capital allowances but others did not. The Upper Tribunal judges however agreed with HMRC that the FTT had incorrectly applied an approach based on a test of necessity. The Upper Tribunal considered that this approach did not reflect the relevant legislation or case law. In its view, the legislation encapsulated a strict and narrow principle and the correct interpretation was that ‘on the provision of plant’ requires a direct link to the physical plant, its delivery, or its installation. Applying this view, and notwithstanding its earlier conclusion on the single/multiple plant issue, the Upper Tribunal agreed with HMRC that none of the disputed expenditure was qualifying, as the expenditure related to the design and/or decisions as to “where, how and when” to install plant rather than the installation itself. The Upper Tribunal rejected an alternative argument that the expenditure was revenue in nature and deductible on that basis, holding that it was open to the FTT to find that the expenditure was still capital in nature even if it was not ‘on the provision of plant or machinery’. The Upper Tribunal also dismissed arguments that deficiencies in how HMRC’s conclusions had been reflected in closure notices meant that the FTT did not have the jurisdiction to alter the amounts of qualifying expenditure incurred to be in line with its decision. (Contact: Ignacio Veloso, Peter Millwood, Matt Smith, Stephen Perry or Adam Cook)
HMRC publish additional guidance on the meaning of R&D for tax purposes
HMRC have published a new set of guidance pages titled Help to see if your work qualifies as Research and Development for tax purposes (GfC3). The guidance forms part of HMRC’s new ‘Guidelines for Compliance’ (GfC) programme which sets out HMRC’s views on a number of complex or widely misunderstood UK tax risks. In GfC3, HMRC note that the definition of research and development for the purposes of claiming R&D tax relief or R&D expenditure credits (RDEC) is set out in statutory guidelines issued by the Department for Science, Innovation & Technology (DSIT). HMRC warn however that they continue to see many misunderstandings of what is and is not R&D under the DSIT guidelines. HMRC state that GfC3 is intended to expand upon their existing guidance on the DSIT guidelines and stress that GfC3 does not represent a change in their view of the law. The guidance is divided into six parts: purpose, scope and background; the expectations of claimants; the importance of a competent professional; how to identify qualifying R&D activities; the recommended approach to claims and record keeping; and further information. The guidance also includes reminders of recently introduced additional statutory requirements for companies: to complete and submit a detailed ‘additional information form’ to support any R&D claims made in corporation tax returns from 8 August 2023; and for certain companies to notify HMRC if they are planning to make an R&D claim, for accounting periods beginning on or after 1 April 2023.
Non-Domestic Rating Act 2023 – Royal Assent
Shortly before the prorogation of Parliament ahead of next week’s State Opening and King’s Speech, Royal Assent was given to the Non-Domestic Rating Act 2003. The Act, which applies primarily to England, implements a number of reforms to business rates arising from the UK government’s review of business rates held in 2020 and 2021. Measures within the Act include: reducing the time between revaluations in England of a property’s rateable value from five years to three years beginning in 2026; corresponding new duties to require ratepayers in England to provide the Valuation Office Agency with information about themselves, their properties and their businesses, underpinned by a new compliance regime; and a new business rates relief for improvements to existing properties (also applying, at the request of the Welsh Government, to Wales). The Department for Levelling Up, Housing & Communities has written to English billing authorities with further information on the key changes arising from the Act.
Piramal Healthcare UK Ltd: import VAT recovery by non-owners – First-tier Tribunal
Piramal Healthcare UK Ltd imported pharmaceutical goods belonging to its overseas customers for processing (e.g., turning into tablets), testing, or research purposes. As the importer, it accounted for import VAT. However, as it did not own the drugs, HMRC decided that it was not entitled to any input tax recovery. The First-tier Tribunal has rejected Piramal’s appeal. In its view, the CJEU decisions in DSV Road and Weindel Logistik meant that importers had to demonstrate that the goods (and therefore the associated import VAT) were a cost component of a supply in the same way as a purchaser of UK goods who was charged UK VAT. What this meant, in practice, was that import VAT could only be recovered by Piramal if it owned the goods (aligning with HMRC’s position in Revenue & Customs Brief 2(2019) and Revenue & Customs Brief 15(2020)). The First-tier Tribunal was not persuaded otherwise by arguments presented by Piramal around VAT on imports of goods belonging to others which are put to private use (section 27 of the Value Added Tax Act 1994) or about regulations accepting that the party claiming input tax need be described as importer or owner. The First-tier Tribunal also largely disregarded guidelines issued by the EU VAT Committee (which supported HMRC’s position). Therefore, except for slightly adjusting the period which should be assessed, the First-tier Tribunal dismissed Piramal’s appeal.
Dbriefs webcast
The next EMEA Dbriefs Tax webcast is on Wednesday 8 November 2023 at 15.00 GMT/16.00 CET. Policy And Practice: The UK’s Post-Brexit Trade Landscape is from our Indirect Tax and Trade series and will be hosted by Amanda Tickel. During this webcast our panel will discuss how the UK’s post-Brexit trade policy is developing at pace, with new trade agreements being negotiated by the UK and a new relationship with Europe being implemented. Our Dbriefs webcast looks at what’s been going on, what these changes mean for businesses, and what practical steps businesses should be considering.