Plant and machinery allowances are at their most valuable in relation to buildings and large structures, but this is also the area that can cause most confusion.

For example, accountancy draws a distinction between the property (on the one hand) and the fixtures and fittings (on the other). But fixtures in the capital allowances sense will be under the property heading, and the accounts will not distinguish between the bricks and mortar (not eligible for allowances) and the electrical costs (which do qualify). So how is the qualifying expenditure to be quantified?

Case law, meanwhile, draws a distinction between the setting on the one hand (not qualifying) and the plant within that setting (which does qualify). But much of the plant (e.g. the lifts or toilets) are in fact an inherent part of the property/setting.

Resolving these apparent contradictions is the essential starting point if allowances are to be claimed for property-related expenditure. This is a two-stage process, so qualifying expenditure must pass the case law question of what constitutes plant, but must also overcome any statutory hurdles. We have already looked at the meaning of plant, so the focus of this article is on the statutory rules within the Capital Allowances Act 2001.

Buildings and structures – restrictive provisions

The restrictive nature of the legislation is clear cut:

Section 21 states that “expenditure on the provision of plant or machinery does not include expenditure on the provision of a building”. In essence, a building is not plant or machinery, and the section catches the cost (whether the property is being built or bought).
The exclusion applies to any asset that is incorporated into a building or is of a kind normally incorporated in a building. So all property fixtures – central heating systems; baths, showers and toilets; electrical systems; alarms and so on – are at first glance denied allowances.
The exclusion applies also to any asset that is in, or connected to, a building, if that asset is included in “List A”. List A is widely drawn to include (amongst other items) walls, floors, doors, windows, stairs, systems for key services, fire safety systems, and more.
Section 22 denies plant and machinery allowances for expenditure on structures (and certain other assets) in much the same way as section 21 blocks the cost of buildings.

If that were the end of the matter, plant and machinery allowances would effectively be denied for all property-related expenditure.

Relaxations of the restrictions

In reality, however, both sections 21 and 22 are “subject to section 23”, and this opens wide the opportunities to make legitimate claims for property fixtures.

Section 23 is headed “Expenditure unaffected by sections 21 and 22”. So – for specified types of expenditure – it overrides all of the restrictions in sections 21 and 22.

Section 23 can usefully be divided into two.

Subsection 2 lists various other provisions of the Act, for example in relation to integral features. If we then go to those other provisions, we find a positive statement that the expenditure in question does qualify for allowances. So (for example) the cost of integral features is qualifying expenditure, and we do not need to worry about sections 21 or 22, or even about case law definitions of plant or machinery.

Subsection 3 then introduces “List C”. List C is not difficult but is quite long, and it is worth spending a few minutes looking at the detail. Rather than working through every item, however, let’s bring out some general principles as to how it works.

The key point is that the effect of being included in list C is that a given asset is freed from the statutory restrictions of sections 21 and 22. BUT it does not necessarily follow that the item in question qualifies as plant or machinery.

A cold room, for example, is clearly a building (or incorporated in a building). As such, it is caught by s. 21 and if that were the end of the matter no plant or machinery allowances could be given. However, s. 21 is subject to s. 23, and so we can search for a let-out clause in that later section.

Item 4 at List C in s. 23 specifically refers to a cold room, so we can stop worrying about the s. 21 restriction as it no longer applies. So we have dealt with the s. 21 problem, but we are not yet home and dry because we still need to determine whether a cold room qualifies as plant on ordinary case law principles. The answer will depend on the nature of the cold room and will have to be determined in the light of all the facts. In many cases, it will indeed qualify.

Another illustration can be given with partition walls. As mentioned already, s. 21 tells us that expenditure on walls does not qualify as plant or machinery. Item 13 at List C says that the restriction does not apply to “Partition walls, where moveable and intended to be moved in the course of the qualifying activity”. So where a partition wall is moveable, and where there is a genuine intention to move it in the course of (for example) a trade, the statutory restriction on claiming allowances is disapplied. The question of whether or not the partition will qualify is then to be decided on case law principles, and there is a good chance that it will.

As a third and final example, consider the question of land alteration. Section 22 in fact denies allowances not only for structures but also for “any works involving the alteration of land”. However, item 22 at List C disapplies that restriction if the land alteration is “for the purpose only of installing plant or machinery”.

HMRC commentary on capital allowances can be found in some weird and wonderful places, and in this case we can turn to HMRC guidance for the pig industry. As HMRC state, “the cost of levelling land in order to provide a stable base for a heavy machine would qualify, but the cost of levelling land in order to lay a hard standing or a foundation for a building would not qualify”.

This is not an area that is standing still, however, and there was much discussion of the “alteration of land for the purpose only of installing plant or machinery” issues in case law reported just last year. The meaning of “install” was aired at some length in the joint Cheshire Cavity and EDF Energy appeal, and the reasoning was approved by the Upper Tribunal in SSE Generation. And in Urenco, there were some complex arguments about the meaning of “land” in this context, which were not fully resolved.

So claiming for plant and machinery in connection with buildings is a hugely valuable exercise, but needs great care and attention. The case law meaning of “plant” is fundamental, of course, but a defensible claim also requires a careful analysis of the statutory restrictions and of the relaxations of those restrictions, and of the ongoing case law interpretations of the relevant legislation.