SSE Generation Wins Tax Relief Fight in UK Supreme Court

SSE Generation Wins Tax Relief Fight in UK Supreme Court

The UK Supreme Court has held that expenditure on building various underground conduits and tunnels in the Glendoe Hydroelectric scheme qualify for capital allowances.

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. It was observed that 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.

The brief background of the is case that the Glendoe hydro-electric power plant at Loch Ness was constructed between 2006 and 2012 by SSE Generation Ltd- Respondent. 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 Commissioners for His Majesty’s Revenue and Customs (HMRC)- appellant.

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 minimize the environmental impact of the plant.

SSE claimed ‘plant and equipment’ capital allowances on its expenditure on these items amounting to around £200 million. 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 as per 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 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.

HMRC appealed the decision of the CA on several 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.

However, the Supreme Court disapproved 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.

The Supreme Court observed 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.

As a result, Supreme Court unanimously dismissed the appeal, holding that the disputed items are neither a ‘tunnel’ nor an ‘aqueduct’ within the meaning of those words as used in section 22 List B of Chapter 3, Part 2 of the Capital Allowances Act, 2001.

The Court affirmed the expenditure incurred of £200 million on Glendoe qualifies for capital allowances, and SSE shall receive over a c.50-year period as tax relief against the overall taxable UK profits of the Group.