Wellstead v HMRC [2016] UKFTT 0492 (TC)

Prior to 2011 industrial building allowances (IBAs) provided a 100% immediate tax deduction of construction costs incurred developing industrial buildings inside qualifying 'enterprise zones'¹.  While IBAs have since been abolished ², litigation relating to IBA claims made in earlier income years is still filtering its way through the ever prudent judicial system.

This case concerns Mr Wellstead who acquired a 122 year sublease in an industrial property from Hillford Construction Limited (HCL) in the 2004 income year.  The 122 year sublease was a revisionary lease that lasted until 5 days before the end of HCLs lease, meaning that possession would fall back to HCL for just five days before the original lease in question actually ended.

The reason this is important is because s.296 of the Capital Allowances Act 2001 (CAA) provided that where a 'relevant interest' in an industrial building was sold to a buyer before the building was used, the buyer could inherit the purchase price as its 'qualifying expenditure' for IBA purposes³.

This case concerns 'relevant interests'.  Specifically, did Mr Wellstead have a relevant interest in this property?

Legislation

Section 286(1) of the CAA provides:

"The relevant interest in relation to any qualifying expenditure is the interest in the building to which the person who incurred the expenditure on the construction of the building was entitled when the expenditure was incurred."

The interest to which HCL was entitled to was its lease with 122 years remaining.

Section 296(1)(b) provides that an IBA allowance is transferred when:

"[T]he relevant interest in the building is sold by the developer in the course of the development trade before the building is first used."

The question in this case was whether the 'relevant interest' was sold to Mr Wellstead or not.  In other words, would a sale of the 'interest' less five days still count as a 'relevant interest'?

Contentions

The HMRC contended that HCLs full 122 year lease was the 'relevant interest', thus if HCL were to lease the unit to Mr Wellstead for a period of 5 days less than the total lease length, then the 'relevant interest' had not been sold.  Rather, a 'sublease' had been created which could not be claimed for IBA purposes by Mr Wellstead.

Mr Wellstead contended that for all practical purposes his sublease was identical to the 'relevant interest' and thus he received the 'relevant interest' for purposes of the IBA legislation.  His position was that parliament intended for taxpayers to claim IBA allowances when they satisfied the general criteria, as opposed to having claims disallowed based on pedantic technicalities.

Decision

"We agree with Mr [Wellstead's] submissions in relation to section 288. As a matter of law the grant of a lease or a sub-lease does not affect the nature of the interest out of which it is granted, whether it is a freehold or a leasehold interest. The leaseholder owns the same interest in the property before and after the grant of a sub-lease. However these provisions introduce the concept of a relevant interest, which governs entitlement to IBAs. It seems to us that Parliament, in enacting section 288(1), anticipated that there may be circumstances where the grant of a lease might cause a relevant interest to cease to exist for the purposes of the scheme of the legislation."⁴

"[The HMRC] pointed to the strict qualifying conditions for IBAs including qualifying expenditure on a qualifying building. The construction contended for by the [HMRC] produced what he described as an entirely reasonable result. It was entirely reasonable to treat separate interests in a different way. However he could not identify any policy reason why IBA’s should be available to a purchaser by way of assignment of a headlease but not available to a purchaser of a sub-lease for the whole term of the headlease, save a few days.  In particular if the economic effect of a sub-lease is the same as an assignment then there is no policy reason why IBAs should not be available. It was not suggested that there was any policy connected with tax avoidance or abuse of the provisions which should distinguish those situations. Certainly there is no suggestion that the transactions between HCL and Mr Wellstead were in any way connected with tax avoidance."⁵

"[Mr Wellstead's] overarching submission was that the grant of the Underlease answered the statutory description of a sale of the relevant interest with the result that the purchase price paid by Mr Wellstead qualified for IBAs. For the reasons given above we accept that submission."⁶

Notes

Case [2016] UKFTT 0492 (TC):  http://www.bailii.org/uk/cases/UKFTT/TC/2016/TC05242.html

1.  http://www.cap-allow.com/articles/commercial-property-allowances
2.  http://www.cap-allow.com/articles/commercial-property-allowances
3.  p21
4.  p53
5.  p58
6.  p60

Legislation

Capital Allowances Act 2001 (prior to the abolition of IBAs)