B & E Security Systems Ltd v Revenue & Customs [2010] UKFTT 146 (TC) (26 March 2010)

DECISION

Introduction

1. This is an appeal by the Appellant company against the issue by the Respondents of Closure Notices and Revenue Amendments for two Accounting Periods, namely those ending on 31 August 2001 and 31 August 2002. These were issued respectively to the Appellant on 21 December 2004 and June 2005.

2. The issue at stake in these proceedings is as to whether or not a sum of £63,050 incurred by the Appellant on the construction of a control room to house security equipment does or does not properly amount to qualifying expenditure on plant and machinery.

Factual Background

2. The Appellant is a company engaged in the installation, maintenance and monitoring of intruder alarm systems. In addition, the company is involved in the operation of a control room at a business address in Northern Ireland, the precise location of which need not for the purposes of this decision be disclosed. Inside its control room, the Appellant has installed sensitive surveillance equipment, the precise function and nature of which again need not be disclosed for the purposes of this decision. An agreed Statement of Facts was submitted by the parties to the Tribunal, which in summary form stated as follows.

3. The principal activity of the Appellant is the provision of security systems. The company has a business address in Northern Ireland. The company makes up accounts annually to 31 August.

4. The company’s accounts, Corporation Tax Return and Capital Allowances computation for the year ended 31 August 2001 were submitted to the Respondents on 5 June 2002 by Messrs Irwin Donaghey & Company, Chartered Accountants. During the year ended 31 August 2001 the company incurred expenditure of £61,173 on security equipment in the form of computers, cameras and the like, and a further £38,441 on the construction of a control room in an existing building where the security equipment is housed. The company claimed Capital Allowances; first year allowance, 100% on £99,614, being the total of the equipment and control room expenditure for the year ended 31 August 2001. An enquiry into this aspect of the company’s Return for the accounting period ended 31 August 2001 was opened by the Respondents on 10 January 2003.

5. Subsequently, the company’s accounts, Corporation Tax Return and Capital Allowances computation for the year ended 31 August 2002 were submitted to the Respondents on 4 August 2003 by Messrs Irwin Donaghey, Chartered Accountants. During the accounting period ended 31 August 2002 the company had incurred capital expenditure of £17,485 on security equipment, together with a further £24,609 on the control room. The company claimed Capital Allowances; first year allowance, 100% on £42,094, being the total of the equipment and control room expenditure for the year ended 31 August 2002. An enquiry into this aspect of the company’s Return for the accounting period ended 31 August 2002 was opened by the Respondents on 16 July 2004.

6. The Respondents concluded their enquiries into both returns in December 2004. The enquiry Inspector concluded that expenditure on the control room did not qualify for plant and machinery allowances pursuant to sections 21 and 25 of the Capital Allowances Act 2001. Closure Notices and Revenue Amendments for both of the accounting periods in question were accordingly issued to the company in December 2004 and June 2005, and it is in respect of the issue of these by the Respondents that this appeal has been initiated.

Evidence

7. In addition to the evidential material set out and agreed in the agreed Statement of Facts summarised above, the Tribunal heard oral evidence from a director of the Appellant company, whose identity is known by the Tribunal, but need not be disclosed for the purposes of this decision. This director shall hereafter be referred to simply as Mr A. On the basis of the evidence adduced from Mr A in his evidence in chief and by way of cross examination, the Tribunal makes the following additional findings of fact.

Additional Findings of Fact

8. The Tribunal was satisfied that whereas the core business of the Appellant company had originally been that of a domestic and commercial alarm company, that role altered significantly whenever the company widened its trading activities so as to encompass sensitive surveillance type work. The Tribunal accepts that it was the pursuit of two contracts in particular by the company which led directly to the construction of the control room in question. The first of these was a contract to provide surveillance monitoring services for two public sector security related organisations. The second was a contract to provide and monitor security related town centre closed circuit television facilities for a large town in Northern Ireland. The Tribunal accepts on the basis of the evidence adduced before it that it was for reasons connected with the obtaining of these two contracts, and most particularly the first of these two contracts, that substantial works of construction and alteration needed to be carried out to create a custom built control room, from where the surveillance monitoring services in question could be carried out.

9. The Tribunal accepts the evidence of Mr A when he maintained that had it not been for the company attempting to secure for itself the two contracts in question, and most significantly the first of the two contracts, there would not have been a need for the control room to have been constructed. Mr A‘s evidence on this issue, which the Tribunal accepts, is that had it not been for the prospect of the contracts in question being obtained by the company, and the demands which those contracts entailed the company would have been content to have operated from its existing building, or from a temporary building, without there having been any need for a control room to be constructed. Mr A told the Tribunal, and this the Tribunal also accepts, that it was made clear to him in no uncertain terms that if the company was going to be able to obtain the surveillance monitoring services contract, a specialised and specially constructed type of control room was going to have to be provided and made available, and moreover that its design and method of construction was going to have to be such as to satisfy the requirements of the relevant British Standard Code of Practice governing the construction of Control Rooms. Once the construction work was carried out, the control room was inspected by one of the public sector security related organisations for which the first of the two contracts referred to above was to be carried out, and since the inception of that contract, there have been ongoing annual inspections to ensure that the control room continues to comply with the client’s requirements. The Tribunal has on the basis of the evidence adduced before it no difficulty in finding that had the construction work in question not been carried out in respect of the existing room, so as to enable that room to be converted from what it previously was into a bespoke control room, sufficient to meet the demands of the first of the two contracts referred to above in particular, that contract would not have been capable of having been secured or performed.

10. The room selected for alteration into the control room was contained within an existing building already in the use and occupation of the company. That existing room had to undergo substantial works of alteration so as to turn it into the control room in question. The existing walls, floors and ceiling required to be strengthened with reinforcing materials, and they were so strengthened. A floor compatible with extensive computer usage needed to be installed, and was installed, providing for the benefit of the room underfloor access from outside for extensive cabling. An interlock needed to be fitted and was fitted, as were fire proof security doors. The room was also adapted in such a manner as to render it substantially independent in terms of its facilities from outside in terms of its continued operation; it was provided with washroom facilities and a kitchen. A new independent power supply was provided, batteries were put in place, and the room was provided with its own generator, which was itself housed in a newly constructed generator house. The works in question took in total six months or thereabouts to complete. No planning permission was required for the works, the Tribunal was informed, due to the existing footprint of the building was not being altered

11. The control room itself was constructed before the equipment which it was to house was purchased and installed within it. Once however the control room had been constructed, the company then proceeded with the purchase of the computers, screens, monitoring devices and other equipment which it required, and upon their acquisition those items were placed inside and installed as appropriate in the control room.

12. The Tribunal is also satisfied on the evidence adduced before it that the need for the control room to be constructed arose not solely out of pursuit by the company of the first of the two contracts referred to at paragraph 8 above, but also of the second of the two contracts, namely that involving the provision and monitoring of security related town centre closed circuit television facilities. In connection with the second of the two contracts, The Tribunal accepts that an approved control room would still have been required to have been provided in connection with the second contract alone; the necessary specification for that alone however would not have been so extensive as was required in connection with the first contract

Issue

13. The central issue in this case is as to whether or not the expenditure incurred by the company on the construction of the control room does or does not fall properly within the ambit of section 25 of the Capital Allowances Act 2001. Another way of posing the same question is to ask whether or not that expenditure amounts to capital expenditure incurred on alterations to an existing building incidental to the installation of plant and machinery for purposes of the company’s qualifying activity. If it does, the appeal brought by the company should succeed; if it does not, then the appeal fails.

14. The dispute between the parties is confined to the expenditure incurred in connection with the construction of the control room itself. There is no dispute as to the sums expended in connection with the acquisition of security equipment. These amounts, the Respondents have already accepted, represent expenditure on the provision of plant or machinery. The only amounts in dispute are therefore the £38,441 expended on the construction of the control room during the year ended 31 August 2001, and the £24,609 expended on the construction of the control room during the year ended 31 August 2002, a total amount of £63,050. No distinction was sought to be made by either party as between any component part or parts of the £63,050, and the Tribunal did not receive from either party assistance or detail as to how this figure had been computed or made up. The Tribunal is unable therefore to consider separately or distinctly any individual elements of the disputed figure, which has been agreed between the parties in the sum of £63,050.

The legislative framework

15. Section 21 of the Capital Allowances Act 2001 [“the 2001 Act”] provides as follows:

[1] ‘For the purposes of this Act, expenditure on the provision of

plant or machinery does not include expenditure on the provision

of a building.

[2] The provision of a building includes its construction or acquisition

…………………………….’.

Section 25 of the 2001 Act provides as follows:

‘If a person carrying on a qualifying activity incurs capital expenditure

on alterations to an existing building incidental to the installation of

plant or machinery for the purposes of the qualifying activity, this

Part applies as if –

[a] the expenditure were expenditure on the provision of plant or

machinery; and

[b] the works representing the expenditure formed part of the plant

or machinery.’

Submissions of the parties

16. For the Appellant company, Mr Irwin urged the Tribunal to answer the question posed at paragraph 13 above in the affirmative. He relied upon the decision of the House of Lords in Commissioners of Inland Revenue –v- Barclay, Curle & Co Limited [1969] 1 W.L.R. 675. That was a decision which concerned the correct interpretation to be applied to section 300 of the Income Tax Act 1952 [“the 1952 Act”], a predecessor to the current section 25 of the 2001 Act. In that case, one of the issues before the Court was the issue as to whether expenditure incurred on concrete and excavation works carried out in connection with the construction of a dry dock did or did not amount to allowable expenditure on plant or machinery. Having recited the terms of the then subsisting section 300 of the 1952 Act, a section very similar in its terms to section 25 of the 2001 Act currently under consideration, Lord Reid in a passage of dictum appearing at 680g of the report turned to consider what was meant by the use of the word ‘incidental’ in the phraseology which the 1952 Act made use of, namely ‘incidental to the installation of machinery or plant for the purpose of the trade’:

‘Here the word used is ‘incidental’ to the installation of the plant.

Incidental is a wider word than ‘necessary’. In my view, expenditure

necessary for the installation of the plant is already covered by

s. 279. But it may be that the exigencies of the trade require that,

when new machinery or plant is installed in existing buildings, more

shall be done than mere installation in order that the new plant or

machinery may serve its proper purpose. Where that is the case this

section enables the cost of the additional alterations to be included’.

Mr Irwin submitted that in the present case, the works carried out to the control room fell fully within the ambit of the term ‘incidental’ as it appears in the current section 25. By carrying out the work in question, he submitted, the company was doing no more than fulfilling the exigencies of its qualifying activity namely its trade. He submitted that the work to the control room were indeed ‘necessary’ but that even if they were not, they were certainly ‘incidental’ in the sense that they had in practical terms to be carried out so that the new plant or machinery being acquired by the company, namely the security equipment itself, might be able to serve its proper purpose, inside the secure environment of a control room which that equipment inevitably required.

17. For the Respondents, Mr Hone cited and relied upon the decision of the Special Commissioners in JD Wetherspoon plc –v- HMRC Commissioners [2007] UKSPC SPC00657 and also upon Bradley [Inspector of Taxes] –v- London Electricity plc [1996] STC 1054. In the Wetherspoon case, one of the issues before the Court concerned the correct interpretation and applicability of section 66 of the Capital Allowances Act 1990, the immediate predecessor of section 25 of the 2001 Act, and couched in very closely similar terms to the wording employed in the current section 25. Section 66 of the 1990 Act provided;

‘Where a person carrying on a trade incurs capital expenditure

on alterations to an existing building incidental to the installation

of machinery or plant for the purposes of the trade, the provisions

of this Part shall have effect as if that expenditure were

expenditure on the provision of that plant or machinery and as if the

works representing that expenditure formed part of that machinery

or plant.’

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…………….

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.

First-tier Tribunal (Tax)

THE COMMISSIONERS FOR HER MAJESTY’S

REVENUE AND CUSTOMS (Capital allowance) Respondents

ALISTAIR F W DEVLIN

TRIBUNAL JUDGE

RELEASE DATE: 26 March 2010

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You are here: BAILII >> Databases >> First-tier Tribunal (Tax) >> B & E Security Systems Ltd v Revenue & Customs [2010] UKFTT 146 (TC) (26 March 2010) URL: http://www.bailii.org/uk/cases/UKFTT/TC/2010/TC00452.html Cite as: [2010] UKFTT 146 (TC)