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Lovell Consulting considers the outcome of the JD Wetherspoon Capital Allowances claim as heard by the Upper Tribunal earlier this year.

Introduction

The Upper Tribunal published a decision on 31 January 2012 in relation to the fit out of J D Wetherspoon (JDW) pubs. This follows on from the First Tier Tribunal's decision published in December 2009 and the original Special Commissioner's  decision in December 2007. The 2012 decision focused on three particular areas that were still in contention:

1. "Plant or Premises" for Timber Panelling
2. lncidental Expenditure
3. Apportionment of Preliminaries

The examples noted below are specific to the facts presented but the reasoning behind the decisions and the application in other situations is potentially far reaching. Wherever a refurbishment or fit out to existing premises has occurred, there may well be potential to identify additional Capital Allowances and claim these in a current or open tax return.

1. Timber Panelling

• JDW had argued that the timber panelling in their pubs was a decorative asset and could therefore be claimed as Capital Allowances under CAA 2001 s 23.
• The Tribunal stated the critical question was "whether the decorative panelling is more appropriately described as part of the premises in which the pub's  trade is carried on or instead  as an embellishment used to enhance the atmosphere of those premises".
• The Tribunal decided that the panelling was an "unexceptional component" of the pub and had become" part of the premises" and could therefore not be claimed as a decorative asset.
• On the same basis the cornicing, architraves and balustrade ends were also disallowed.
• However, the Tribunal referred  to the Wimpey International Ltd v Warland (1988) case and advised that in that case some panelling had been permitted, but that the permissible panelling "was by no means unexceptional" as it included "finishings in bronze or silver mirrors or infills of melamine, hessian or a textured sandstone effect."
• Panelling and other decorative assets should therefore be reviewed on a case by case basis to assess whether it is an "unexceptional component' and whether it "forms part of the premises"

2. Incidental Expenditure

HMRC queried a number of cost items claimed by JDW for incidental expenditure for the installation of plant and machinery. The decisions are summarised below:

Splashbacks/ Tiling/ Flooring

• The definition of splashbacks does not extend to part of a tiled wall that has a splashback function.
• However, a splashback to other equipment which produces splashing (e.g., cookers) is allowable.
• Similarly where non slip and wipe-clean floors were installed these were needed for the operation of the equipment, not for the installation of the equipment and therefore were not allowable under CAA 2001 s 25.
• The Tribunal stated that the dividing line is between splashbacks specifically provided for splash producing equipment (which will qualify under CAA 2001 s 25) and other wipe clean and / or non-slip surfaces which form parts of walls or floors (which are therefore non-qualifying)

Reinforcement of Kitchen Floor

• An existing timber floor was removed and a strengthened concrete floor was installed to take the load of kitchen equipment.
• This special strong floor was required before the equipment could be used at all and the kitchen equipment needed to be installed in the kitchen.

Therefore allowable as plant under CAA 2001 s 25 as incidental.

Lighting

• Toilet lighting allowed as plant as it had trade specific function in that it provided an attractive ambience in the toilets.
• Cutting holes for lighting in the toilet ceiling, installing a lighting pelmet (a panel to obscure light fittings) and the formation of a drop ceiling in toilets were all allowable as plant under CAA 2001 s 25.
• Such incidental work is also allowable under CAA 2001 s 25 to other areas( e.g., the kitchen) where the lighting was allowable plant, and also includes holes for qualifying power points.

Toilet Cubicles

• Confirmation that brickwork and blockwork cubicles are not allowable under CAA 2001 s 25.
• Panels to hide cisterns and pipework allowable under CAA 2001 s 25.
• Tiling to the walls was not allowable.

Cold Store Drainage

• A sloping floor was installed within a cold store so that spillages, etc., would flow to a drainage channel and associated pump (both agreed as plant).
• Held that the inclined floor was allowable as incidental to the installation of plant, along with demolition costs of old floor to allow for new cold store floor.
• Considered it immaterial that the costs of the inclined floor were relatively higher than the costs of the drainage channel and associated pump.

Hoist Shuttering

• Shuttering constructed around the food hoist was allowable under CAA 2001 s 25.
• Tiling on the shuttering was not allowable as it was "simply a finishing coat round the shuttering, no more eligible for allowances than the painting".

3. Preliminaries

• There has been a long running contention between HMRC and those claiming Capital Allowances on how best to apportion preliminaries. 
• "Preliminaries are, by their nature, items of overhead expenditure which cannot be, or which have not been, attributed to any single item in the building project."
• The Tribunal stated that "It cannot have been the intention of the legislature that a trader should have to spend more on the minute attribution of preliminaries to underlying items of work than either their cost or the value of the Capital Allowances thereby to be obtained".
• Accordingly HMRC's cross appeal on this point entirely failed and a pro rata apportionment of preliminaries is allowable.