Hydro-electric scheme wins capital allowances dispute

The Supreme Court has held that expenditure on building various underground conduits and tunnels in the Glendoe Hydroelectric scheme did qualify for capital allowances: HMRC v SSE Generation Ltd [2023] UKSC 17. In a decision that could be significant for the renewable energy sector, the Court has held that the exclusions for “tunnels” and “aqueducts” in the capital allowances legislation did not apply to the structures constructed by SSE as part of the power plant.

The Court has held that, read in context, the references to tunnels and aqueducts should be limited to, broadly, where they are used for transportation and not where they are part of an engineering complex for the generation of electricity.

Background

The Glendoe hydro-electric power plant at Loch Ness was constructed between 2006 and 2012 by SSE. It is the only large-scale hydro-electric scheme of its type built in the UK in the last 50 years. The construction of the plant involved a number of conduits for the passage of water to, through and out of the turbines and it was these conduits that were the source of the dispute between SSE and HMRC. As the Court noted, a unique feature of the Glendoe scheme was that many of the assets are underground, including the generating equipment sited in an underground cavern, so as to minimise the environmental impact of the plant.

In particular, the construction included:
• various conduits used for gathering and conveying water diverted by the main water intakes to the reservoir, namely: a drilled and blasted underground conduit, lined with shotcrete; a “cut and cover” concrete conduit; and uncovered channels, lined with rocks or concrete.
• the headrace, which provides pressurised water to the generating equipment, sourced from the main intake at the reservoir.
• the tailrace, which releases spent water from the generating equipment into Loch Ness.
• the turbine outflow tunnel, which joins the outflow of the turbine to the tailrace, and other dewatering and drainage tunnels.

SSE claimed “plant and equipment” capital allowances on its expenditure on these items amounting to around £200m. It was not disputed that the expenditure was incurred for the purposes of a qualifying trade and that the items were “plant”. However, HMRC rejected the claim on the basis that these items fell within the scope of plant that was specifically excluded from qualifying for capital allowances. In particular, Capital Allowances Act 2001 section 22 excludes expenditure incurred on items included in List B. Item 1 in List B reads, “A tunnel, bridge, viaduct, aqueduct, embankment or cutting”. HMRC contended that all of the various disputed conduits and tunnels used for the water flow in the scheme amounted to “tunnels” or “aqueducts” and so were excluded from qualifying for capital allowances.

SSE had appealed HMRC decision not to allow capital allowances on its expenditure and had been (largely) successful at the lower tribunals and courts. The FTT, Upper Tribunal and Court of Appeal (CA) had all held in favour of SSE on, essentially, the same grounds.

Whilst the ordinary meaning of the word “tunnel” might encompass any form of “subterranean passage”, the word must be read in the context of the surrounding words, including “bridge” and “viaduct”. These words all have the connotation of civil engineering works related to the construction of transportation ways and routes and the meaning of “tunnel” must be construed in that light. In context, therefore, “tunnel�� means an underground passageway used to facilitate access from one end to the other of persons or means of transport. Equally, whilst the ordinary meaning of the word “aqueduct” could be either a simply a conduit to carry water or an elevated structure to carry water across a valley etc, read in context together with “viaduct”, it was clear it carried the second meaning in this case, following the transportation theme inherent in the other words in Item 1.

Decision of the Supreme Court

HMRC appealed the decision of the CA on a number of grounds. Their criticism of the CA decision included the argument that the CA had impermissibly inferred that Parliament had intended to narrow the ordinary wide meaning of the words used by reference to the context in which they were used. This was particularly so since List C saved from disqualification a limited class of items otherwise in List B, such that it was impermissible to restrict the meaning of the items in List B. And, in any event, the thematic connections with transport of persons in Item 1 did not justify limiting the meaning of the statutory wording.

The Supreme Court has rejected these arguments. The Court noted that “HMRC’s approach involves an assumption either that their preferred meaning is the ordinary meaning of the word, or that where there are two ordinary meanings for a word the wider meaning should be taken to be the ordinary meaning. Neither assumption is justified. In this case the Court of Appeal identified two possible ordinary meanings of both the words “tunnel” and “aqueduct”, not one such meaning. Where there are two ordinary meanings there is no reason for making an a priori assumption that the wider meaning should be taken”. There was nothing in List B to indicate an intention to cast the net as widely as possible.

Where there are two ordinary meanings to the relevant words, some method needs to be found to decide which meaning is intended and there is nothing wrong in principle in relying on a thematic connection which explains the grouping of words in a list. The Court noted that each of the items in List B are grouped thematically. Accordingly, the Court agreed with the CA that the meaning of tunnel depended on its context and, in this case, meant a subterranean passage for a way to pass through.

Equally, the meaning of “aqueduct” in this case should take its context from “bridge” and “viaduct” and in the theme of structures relating to the construction of transportation routes or ways. As such, it connotes a bridge-like structure for carrying water, such as where a canal is carried over a river or valley. Whilst “aqueduct” differed from the other words in Item 1 in indicating what the route is for (aqua), that justified a wider meaning to that particular term but did not undermine the general theme running through Item 1. If HMRC were right that it simply meant any water conduit, it would be very surprising for it to be listed alongside “bridge, viaduct” in Item 1 and would render other water conduits that are specifically listed elsewhere (such as canals, dikes and drainage ditches).

As a result, the Supreme Court has dismissed HMRC’s appeal and upheld SSE’s right to claim capital allowances on its expenditure on these items.

Comment

The decision may prove important for other civil engineering schemes involving water conduits where HMRC have argued that the capital expenditure incurred is excluded from capital allowances on the basis that the conduits are “tunnels” or “aqueducts”. This is particularly so since, in 2018, HMRC introduced changes to the rules to ensure that for claims on or after 29 October 2018, capital expenditure on altering land only for the purposes of installing plant or machinery will only qualify for capital allowances where the plant or machinery being installed also qualifies.

Of course, it will be important for taxpayers to ensure that expenditure is clearly allocated to qualifying plant and machinery to take advantage of this decision in appropriate cases.