[2011] UKFTT 65 (TC)

TC00943

Appeal number: TC/2010/01939

Income Tax-Capital Allowances-furnished ‘eco’ holiday lettings -whether whole site can be plant - no -are specific items plant and machinery-stone floor – windows- paint and decorating-earth bund- no- appeal dismissed

FIRST-TIER TRIBUNAL

TAX 

	Mrs M E McMILLIN	Appellant

	- and -

	THE COMMISSIONERS FOR HER MAJESTY’S
	REVENUE AND CUSTOMS	Respondents

		TRIBUNAL: 	Barbara J King (Tribunal Judge)								Leslie Brown (Lay member)	

Sitting in public at Southwaite Green on 8 November 2010

Mrs M McMillin the Appellant in person

SuzanneWhitley and Colin Ellis of HMRC for the Respondents

© CROWN COPYRIGHT 2011

DECISION
Introduction
1.	Mrs McMillin bought a house and some barns at Southwaite Green, near Cockermouth in July 2003 and shortly afterwards she bought an adjacent piece of land. The barns were demolished and building work started in July 2006 first on the main house and subsequently on four cottages. Throughout the time of the work Mrs McMillin was an accountant, working as a partner in KPMG. The first ‘holiday let’ of one of the cottages started on 31 March 2007, and in her Income tax return for the Tax year 2006 -07 she claimed Capital Allowances. Expenditure on various items was agreed between Mrs McMillin and HMRC and this appeal now relates to expenditure which has not been agreed. It involves expenditure on  (i) Stone floors (ii) windows (iii) Paint and decorating (iv) and an Earth Bund. The total amount of expenditure still in dispute amounts to £53,835.
2.	 Mrs McMillin contends that the expenditure on these items should all be allowed as losses against her income because the whole site, other than the shell of the buildings, at Southwaite Green should be classed as plant or alternatively each item should be classed as plant or machinery.
3.	The Respondents contend that each item is excluded from the definition of plant and machinery by statute. 
Legislative background
4.	What can and cannot qualify for Plant and Machinery Allowances is laid down in the Capital Allowances Act 2001.  Section 11 provides that allowances are available if a person caries on a qualifying activity and incurs qualifying expenditure. Qualifying activities are defined in section 15 and include at 15(1) (c) a furnished holiday lettings business. Qualifying expenditure is covered by sections 21, 22 and 23. 
5.	Section 21(1) provides that ‘...... expenditure on the provision of plant and machinery does not include expenditure on the provision of a building’ and regulation 21(2) provides that ‘..provision of a building includes its construction or acquisition.’
6.	Section 21(3) involves assets which might be incorporated or not incorporated in the building and then includes at (c) ‘List A’ –which is assets which are treated as buildings. List A includes at number 1 - walls, floors, ceilings, doors, gates, shutters, windows and stairs.
7.	Section 22 deals with expenditure on structures which are excluded from the possibility of ‘Plant and Machinery Allowance ’ and section 22(1)(b) includes provision that expenditure on alteration of land does not qualify. 
8.	Both section 21 and 22 are subject to regulation 23 so that expenditure can be allowed if it comes within ‘List C’ in section 23 and can also be found to be plant. The following points from List C are potentially relevant to this appeal
3. Space or water heating systems; powered systems of ventilation, air cooling or air purification; and any floor or ceiling comprised in such systems.
19. Caravans provided mainly for holiday lettings
22. The alteration of land for the purpose only of installing plant or machinery 
9.	Section 23(4) provides that items 1 to 16 of List C do not include any asset whose principal purpose is to insulate or enclose the interior of a building or to provide an interior wall, floor or ceiling which (in each case) is intended to remain permanently in place.
The Evidence
10.	This appeal was held in a room of the main house at Southwaite Green where Mrs McMillin now lives. We were taken on a tour to see the exterior of all four cottages and the interior of two of the cottages. The cottages have been built in stone, in semi-detached pairs, two being heated with ground source heating and two with air source heating. We were shown the control rooms for the heating systems which contained a number of tanks and pipes, expenditure on which has all been agreed. Two large bundles of documents and legislation had been produced prior to the hearing and at the hearing Mrs McMillin and Mrs Whitely both produced speaking notes. After the hearing Mrs McMillin sent further details concerning the paint used in the properties. 
11.	Mrs McMillin gave evidence that Southwaite Green is an ‘eco holiday development which is meant to demonstrate the benefits of green design, technology and living.’ Customers wishing to rent a cottage can do so through the Southwaite Green’s own web site or through a letting agency. Customers are asked to read a leaflet on arrival at the cottage about how various items function but other than that there is no compulsion to live in an ecologically friendly way or to take note of how anything in the cottages is constructed. 
12.	Mrs McMillin also gave evidence that the cottages are subject to a planning restriction that they can only be used as holiday cottages but the terms of the planning permission were not produced.
Can the whole site be classed as plant? 
13.	We took into account all the case law to which we were referred. We considered that there are only extremely rare cases such as that involving ‘dry docks’ where premises themselves are plant and in our view holiday cottages are not obviously plant. There is always the possibility that they can be used as homes in the future particularly when they are solid buildings, well constructed in stone as is the case at Southwaite Green. There may be a planning restriction currently in force, but we are aware that planning restrictions can be amended or lifted. 
14.	 We were also asked by Mrs McMillin to find that holiday cottages are analogous to caravans which are listed at point 19 in List C in section 23. We were referred to CA22100 which is an advice leaflet in the HMRC manual for tax advisers and which suggests that caravans which are not moved regularly can also be classed as plant, if they are on holiday sites. Wooden lodges can also be classed as caravans provided they are moveable. 
15.	We find that section 23 contains a very specific list of items and at the relevant time this list did not contain a specific reference to holiday cottages or ‘eco holiday developments’. We find that we cannot add holiday cottages or ‘eco holiday developments’ into that list. We further find that the cottages do not come within any definition of caravan and cannot be classed as caravans. 
16.	Taking all of the above into account we find that the cottages themselves are not plant.

Can any of the individual items be classed as plant?
 Stone Floors.
17.	Each of the cottages has under floor heating provided from ground source heating in two cottages and from air source heat in the other two. Heat is pumped through pipes underneath the floors throughout the properties. Brazilian slate has been laid on the ground floor of each of the properties and engineered oak on the upper floors. The same system heats whichever floor it is under. The claim for allowances relates to the slate floors only and not to the wooden floors. 
18.	Mrs McMillin says that the flooring is an integral part of the heating system because this is an ‘eco development’ and energy consumption is reduced when stone flooring is used. She accepted however that wooden floors had been used upstairs because the weight of stone on the upper floors would have been excessive. If it were the case that ‘stone’ floors were part of the system then we would have expected that stone would have had to be used on the upper floors as well –regardless of the cost of reinforcing the floors to take the weight. It was clear that some elements of the project were driven by cost rather than ecological considerations and Mrs McMillin  gave evidence that slate from Brazil had been used instead of slate from the Lake District because of the high cost of the local slate. 
19.	On balance we find that the principal purpose of the slate on the ground floor is to provide a floor for the premises. We do not find that stone/slate flooring is such an integral part of the heating system that that becomes its principal function. We find that the stone floor comes within section 23(4).  The flooring is not therefore saved by List C and has to be considered in List A.
20.	List A specifically notes that floors are assets which are treated as buildings and are thus excluded from plant and machinery allowances. Therefore even if the floor has a secondary function in reducing heating costs which might otherwise have allowed it to be considered as plant, it is excluded.
21.	The screed which was laid beneath the flooring on the ground floors was previously in dispute but has been allowed by HMRC and we do not seek to disturb that agreement. 

Windows
22.	Mrs McMillin says that the windows should be classed as plant because they have a function beyond that of just letting light in at the same time as keeping draughts out. She asserts that they help to control the level of heat in the buildings because they are argon filled and face south. She argued that solar shading is also provided to some of the windows and if solar shading can be classed as plant then so should windows.
23.	We found that not all the windows face south and that most of them could be opened which would defeat any insulation properties they contained. As such they were not sufficiently different from what might be classed as ordinary windows that they were obviously plant. 
24.	We found that they could not be classed as part of the heating system to come within item 3 in List C. In the absence of any specific mention in List C - they were windows, which even if they have a function, they are treated as part of the building and are excluded from plant and machinery allowances by being in List A.
Paint and Decorating
25.	Mrs McMillan gave evidence that she believed that the paint applied to the walls of the cottages helps to keep the air clean. She referred to an Australian case of Wangaratta Woolen Mills Ltd v Federal Commissioner of Taxation where paint applied to the walls of a dye house was held to be plant and she believes that the paint applied at Southwaite Green should be treated in the same way.
26.	She referred to the paint at Southwaite Green as organic paint which is non polluting and dust free. Whilst touring the cottages she also stated that the tourist board would like her to touch up the paint frequently if it becomes marked. Subsequent to the hearing Mrs McMillan produced information from the manufacturers Biofa and from the supplier ‘Natural Alternative Decorating Centre. (N.A.D.C). 
27.	The data sheets from Biofa state that the characteristics of the paint are that it is 
 “Ready to use, solvent free mineral paint.     ....fast drying, wall-covering washable, scratchproof, incombustible, breathing wall paint. Its alkalinity has a sterilising effect.”
28.	N.A.D.C claim that natural paint products are of benefit to asthma and allergy suffers but do not explain exactly why that might be the case.
29.	HMRC argue that the paint has become part of the business premises and therefore fails the premises test set out in Wimpey International Ltd v Warland 1988 STC 149. 
30.	The case of Wangeratta concerned a very specialised operation which was carried out in the dye house where the whole dye house was classed as a single unit of plant, not a collection of bricks mortar, paint, timber etc. We find that this case is not on all fours with the Wangeratta case. The whole site has not been found to be plant and therefore the premises test falls to be applied as in the Wimpey case. 
31.	On balance we find that the claims made by the manufacturers do not support Mrs McMillin’s claim that the paint cleans the atmosphere after it has been applied. The paint may be breathable and may sterilise the wall to which it is being applied but we do not find that a claim is being made that it sterilises the air after application. If, as Mrs McMillin suggests,  the paint does indeed attract less dust onto the wall from the air then the possibility must remain that the dust in the room will remain in the atmosphere and/or be deposited on other surfaces.
32.	We find that none of the information supplied shows that the paint has a function beyond that of covering the walls and making them easier to clean and the paint is not therefore so obviously plant that it can escape the premises test. We find that the paint has not retained a separate identity from the walls onto which it has been painted. It has in effect become part of the premises and is excluded from plant and machinery allowances.
Earth Bund
33.	The earth bund has been created on the north side of one of the cottages. The large north facing windows of that cottage open out onto a sitting out area on the top of the earth bund. Mrs McMillin says that the earth bund was created out of spoil from demolition of the barns and from the building of the four cottages. She did not say that any of the ground source heating equipment had been installed in the earth bund. The control room attached to this pair of cottages did contain an extra tank compared to the control room attached to the other pair of cottages. 
34.	An email from Mike Reaney of Artic Air Cumbria Limited was produced which stated that 
	“The heat pumps were sized on the basis of the size and insulation levels of the buildings. The cottages with the earth mounding are set up on a slightly different principle than the others. In this case we fitted a buffer tank to accommodate a lower heat demand from the cottages than the heat pump output power.
So the design of the system but not the rated size of the heat pump takes account of the mounding.”
35.	Mrs McMillin put forward the argument that the earth bund comes within item 22 of List C. On balance it appeared to us that the main purpose of the creation of the earth bund was to allow for disposal of waste /spoil from the building works which obviated the need for its removal. It was a secondary effect that the bund then provided insulation to the side of one of the cottages. Even if it was the other way around and the primary purpose was to create insulation we were not satisfied that this could be said to ‘ be for the purpose of installing plant or machinery’ but in any event we have found that there were at least two purposes and the wording of the legislation contains the word ‘only’. In our view the earth bund cannot be said to satisfy point 22 in List C in Section 23 and it is then excluded from plant and machinery allowances under section 22(1)(b). 
36.	Mrs McMillin had a further argument that the legislation as in force at the time of the HMRC decision allows for greater allowances to those who develop buildings in non environmentally friendly ways. It is not within the jurisdiction of this Tribunal to amend the legislation and we do not propose to comment on the level of ‘eco friendliness’ used in the development at Southwaite Green or the fairness or otherwise of the legislation. 
37.	 Our decision is that neither the whole site nor any of the individual items can be classed as plant or machinery such as to attract plant and machinery allowances. The appeal therefore fails 
38.	This document contains full findings of fact and reasons for the decision. Any party dissatisfied with this decision has a right to apply for permission to appeal against it pursuant to Rule 39 of the Tribunal Procedure (First-tier Tribunal) (Tax Chamber) Rules 2009.   The application must be received by this Tribunal not later than 56 days after this decision is sent to that party.  The parties are referred to “Guidance to accompany a Decision from the First-tier Tribunal (Tax Chamber)” which accompanies and forms part of this decision notice.

Barbara J King
TRIBUNAL JUDGE

RELEASE DATE: 19 January 2011