Farming News - When Does A Farm Building Attract Capital Allowances?

When Does A Farm Building Attract Capital Allowances?

21 Oct 2021
Frontdesk / Finance

Croner Taxwise recently supported a farming client through the First Tier Tax Tribunal on the tax treatment of specialist buildings operating as integrated single units.  These were found to qualify for tax relief as plant & machinery under the capital allowances rules in the May & JRO Griffiths Ltd tax cases and, in winning these cases, the clients saved tax of £18,000 and £120,000 respectively as well as securing the right to claim allowances on similar future expenditure.

To briefly summarise the facts, in May a grain store was found to be performing the function of drying and maintaining the condition of the crop between harvest and sale and in the Griffiths case a rather more sophisticated potato store performed a broadly similar role in respect of potatoes (albeit with a higher level of functionality). 

In tax legislation there is a general rule that prevents buildings or structures from qualifying for tax relief* but there are a number of specific exclusions from this general rule and if one of these applies (and only one exclusion is required), then the asset may potentially qualify for tax relief under the capital allowances regime as plant and machinery.

The specific exclusion applicable to both cases here is for ‘silos provided for temporary storage', although the additional functionality of the potato store meant that the exclusion in respect of ‘cold stores' was also found to be applicable to that building. 

As neither of the terms ‘silos provided for temporary storage' or ‘cold store' is defined in the tax legislation they took their normal every day meaning and in both cases it was successfully argued that the buildings at issue fell within these general definitions, meaning that they were not excluded from tax relief in principle.

However, that is not the end of the matter. To qualify as plant and machinery the asset must also be used for the purposes of the business rather than simply being the premises or setting within which the business takes place. By way of example a barn or warehouse, which doesn't do anything other than provide shelter, is essentially passive and part of the premises whereas in the cases under discussion both buildings performed a number of active functions they had specifically been designed to undertake.

As the buildings here passed both tests then tax relief was due.

When considering how this outcome was achieved, there are several relevant factors that contributed to the success.

In both cases there was strong witness evidence presented from an experienced arable farming consultant (May) and a well-informed senior working director (Griffiths) which was supported by appropriate published third party material, both academic and practical. Both tribunals found this evidence helpful and referenced it at some length.

In both cases it was also demonstrated to the satisfaction of the judge that the level of expenditure incurred was far in excess of the costs of construction of a ‘normal' building of a similar size.

If considering a claim that may not align with the HMRC view of what is admissible under the relevant legislation the following checklist may be helpful:

  • Undertake a site visit and discuss the issue with the person who may ultimately be a witness should the claim be challenged by HMRC.
  • Do your homework- background research is always helpful and may produce useable material.
  • Are the costs incurred in excess of those for a general building/structure of a similar size? If so, can this be evidenced?
  • Review ‘year on year' profits- has the client's turnover and/or profit increased following incurring the expenditure?
  • Make sure there is a good basis to argue the established plant tests are met.
  • Be prepared to dig in- HMRC can't always be relied upon to be reasonable.
  • If the claim does not align with the HMRC view of the position a ‘white space' entry on the relevant tax return to this effect, provided it is clear, should restrict HMRC from making a discovery at a later date if they don't open an enquiry in time.

There are also tax planning and cashflow issues to consider- the current £1M Annual Investment Allowance and (for corporate entities) the possibility of claiming enhanced allowance under the temporary superdeduction regime shouldn't be overlooked.

What was concerning about these cases is that the May case had already been settled at First Tier Tribunal and HMRC had chosen not to appeal the decision.  Accordingly, whilst FTT cases do not set precedent, the point was made by our appointed Barrister, in the Griffiths case, that HMRC should not be relitigating the same issue repeatedly when they have lost a similar case on the same principles.

Both of these cases were argued over several years with HMRC before they were litigated and were supported by Croner taxwise through the agents' fee protection insurance.  If you would like to know more about how we can assist clients in similar cases, please contact Croner Taxwise on 0844 892 0251 or email consultancy@cronertaxwise.com

* In 2018 relief at 3% was introduced in certain circumstances , but this is outside the scope of this article)