B & E Security Systems Ltd v Revenue & Customs [2010] UKFTT 146 (TC)
FTT-Tax
B & E Security Systems Ltd v Revenue & Customs
[2010] UKFTT 146 (TC) · 2010-03-26
[78]In the Wetherspoon case, the Special Commissioners had cited to them the passage of Lord Reid in the Barclay, Curie decision, as set out above. In reliance upon that dictum, it was submitted that all expenditure on alterations to an existing building qualified under section 66 of the 1990 Act, if the works in question were carried out to enable installed plant to be used for its intended purpose. The Special Commissioners in Wetherspoon said of this passage: ‘ We do not understand Lord Reid in the passage cited from Barclay, Curle to be saying more than that expenditure on alterations to a building (over and above expenditure necessary to install it) was allowable to the extent that such expenditure is incidental to the installation of the plant in order that the plant can function properly by reference to the purpose for which it was installed. Thus, for example, if a cooker is installed, expenditure incidental to the installation may be incurred on the removal of a wall (or part of a wall) in the existing building in which the cooker is installed, to allow proper access to the cooker to make it useful for the purposes for which it was installed. Such expenditure would qualify under section 66. In our view, it would be stretching section 66 beyond its evident purpose to allow expenditure on the construction of kitchen walls to qualify, on the basis that the exigencies of the Appellant's trade, including statutory or regulatory requirements, require that kitchen walls themselves must be constructed so that the cooker may serve its proper purpose. The construction of the kitchen walls was not incidental to the installation of the cookers (or other kitchen equipment). It was part of the creation of a kitchen, in which the cookers and other kitchen equipment could function properly…………….[79]Although we do not consider that the kitchen walls had a sufficient nexus to the installation of the cookers to qualify, we do consider that the timber partitions and doors to the individual toilets at the Prince of Wales and the cubicles at the First Post did have sufficient nexus. We do not consider that Lord Reid's observation was confined to mechanical functioning. The toilets could properly not be used without partitions or cubicles. ‘ In reliance upon these observations, Mr Hone in the present case argued that the works of construction carried out by the company to the control room was not incidental to the installation therein of the security equipment. Rather, he argued, the works in question were part of the creation of a control room, in which the security equipment being acquired as plant or machinery could function properly.18. Mr Hone went on to argue that there was a real difference to be drawn as between on the one hand those alterations to a building which were properly ‘incidental’ to the installation of plant or machinery therein, and on the other hand those alterations which were simply ‘consequential’ on the installation of the plant or machinery. The term ‘incidental’ he argued was inevitably going to be narrower than the term ‘consequential’ and whereas here, the construction works in question might well be said to have been ‘consequential’ upon the installation into what had previously been an existing room of newly acquired plant or machinery, they could not be said to be truly ‘incidental’ to such installation.19. Mr Hone submitted that for section 25 to assist the company it was necessary for the expenditure to have been on alterations incidental to the installation of plant or machinery, in the sense of the plant or machinery not being capable of being installed without the alterations having been carried out. Simply for the company to provide a setting in which to house the plant or machinery he submitted is not sufficient.20. The Respondents further argued that the construction of the control room could not be incidental to the actual installation costs of the security equipment installed inside it, since such equipment would have functioned normally irrespective of whether reinforced walls or a special ceiling were built around them and enclosed them. It was submitted that the expenditure by the company on the construction of the control room was no more than part of the overall cost to the company of it providing premises suitable to enable it to carry out one of the core elements of its business Decision and reasons 20. The issue of principle between the parties appears to essentially be this. Upon the correct application of section 25 of the 2001 Act, does it, as the company contends, encompass capital expenditure incurred on alterations to an existing building which are required so that the plant or machinery installed therein may serve the purpose intended for it in the carrying on of the qualifying activity, or does it only encompass such expenditure which is incidental in the narrow sense to the installation of specific items of plant, as the Respondents contend.21. The Tribunal considers the decision in the Wetherspoon case to indicate that for the expenditure in question without more to have been incurred on alterations to an existing building which are required so that the plant or machinery installed therein may serve the purpose intended for it in the carrying on of the qualifying activity, is not of itself going to be sufficient to bring such expenditure within the ambit of section 25. In addition, there must be shown in the present case to be a sufficient nexus as between the installation of the security equipment, and the construction and putting in place of the walls, floors, ceiling, interlock, washroom facilities and the like. As to whether or not such a sufficient nexus exists, it seems to the Tribunal that this is essentially of question of fact for the Tribunal to address and determine on the basis of the evidence and material adduced before it, and with reference to the particular distinct facts and circumstances of the case before it. 22. In the present case, the following appear to the Tribunal to be of particular significance. Firstly, the Tribunal is wholly satisfied that had it not been for the company pursuing and ultimately securing the two specialist security related contracts already referred to above, none of the construction works which are the subject matter of this dispute would have been carried out. Without the obtaining of the contracts concerned, the existing room within the company’s premises would have remained in its previous form and configuration. The successful pursuit of those contacts inevitably required the company to source and acquire specialist security equipment, accepted as representing plant or machinery. Secondly, the Tribunal is also satisfied that with the successful winning of the contracts, and the acquisition of the specialist security related items of plant and machinery which the obtaining of those contracts demanded, the carrying out of these construction works also became necessary and in practical terms inevitable. 23. The Respondents sought to rely upon the fact that the construction works had been carried out before, and not after, the security equipment had been acquired. The Tribunal does not consider this point to be at all determinative of the issue which it must address. The Tribunal remains to be convinced in the circumstances which here applied that the issue as to which head of expenditure came to be incurred first is necessarily going to be of any particular assistance in the determination of the issue as to whether or not the expenditure incurred is or is not going to be incidental to the costs of acquiring plant or machinery. As a matter of practical reality and common sense, no security company is realistically going to expend a total of £78,658 on specialist security equipment, and then either store that equipment inside an insecure room to which substantial works of construction are carried out by workmen all around the valuable and sensitive equipment, or else store the equipment elsewhere whilst the works of construction are carried out. Nor in the Tribunal’s view need either of these scenarios have operated so as to make the expenditure incurred on the construction works to the control room properly incidental to the £78,658 spent on the plant or machinery. 24. Thirdly, the Tribunal also considers it important that whenever the company came to incur the disputed expenditure, as it did in connection with the construction of the control room, it had little if indeed any discretion as to the precise extent of the works requiring to be undertaken. The company was required to ensure that the works complied with a relevant British Standard with which the company was furnished, and upon completion of the works as indeed annually thereafter the company at the site of its control room has been required to subject itself to annual inspections at the behest of its customer to ensure that the control room continues to comply with the relevant requirements. 25. Fourthly, the Tribunal is mindful of the need in connection with the determination of an issue such as here arises to have regard to the issue of proportionality. As the Special Commissioners observed in the Wetherspoon case:
‘The word ‘incidental’ suggests that the alteration should be subordinate or secondary to the installation of the plant. The New SOED [1993] gives under 2b, ‘Of an expense or charge: incurred apart from the main sum disbursed’
. Here of course section 66 is directed to whether the alterations are incidental rather than whether the expenditure is incidental, however we consider the principle to be no different. This does not necessarily mean that the alterations must cost less then the installation or installations to which they are incidental, however in our view they cannot properly be described as incidental if their costs is disproportionately more’ In the present case, there is no issue of any such disproportionality. The total amount of expenditure incurred on security equipment, accepted as being plant or machinery was £78,658: £61,173 during the year ended 31 August 2002 and a further £17,485 during the year ended 31 August 2002. The total amount of expenditure incurred in the construction of the control room was £61,173: consisting of £38,441 during the year ended 31 August 2001 and a further £24,609 during the year ended 31 August 2002. 26. The Tribunal accordingly, for the reasons set out above, considers on the particular and somewhat singular facts and circumstances of this case, there to have been a sufficient nexus as between the expenditure incurred by the company on the construction room during the years ended 31 August 2001 and 2002, and the expenditure incurred by the company in respect of the acquisition of the security equipment during those same years as to make the former head of expenditure properly incidental to the latter, within the scope and ambit of section 25 of the 2001 Act. The sums incurred on the construction of the control room, namely £61,173 in total, were therefore incidental to the sums incurred on the acquisition of plant and machinery in the form of security equipment in that the former expenditure was inextricably linked with the latter expenditure by means of a close causative nexus, in that the former expenditure would not have been incurred either in whole or in part had not the latter expenditure been inevitably going to be incurred, and also in that the former expenditure was not in any way disproportionate to the cost of the latter. 27. Accordingly the decision of the Tribunal is that the sum of £61,173 does represent incidental alteration costs within the scope of section 25 of the 2001 Act. This appeal is accordingly allowed. 28. At the conclusion of the hearing, both parties indicated to the Tribunal that if successful, neither would be seeking an order for costs against the other. There will accordingly be no order as to costs. ALISTAIR F W DEVLIN TRIBUNAL JUDGE RELEASE DATE: 26 March 2010