A pub crawl around capital allowances
The case is useful because it gives further clarification to the vexed question of capital allowances and the distinction between plant and machinery and additions to premises. There is at times a fine distinction between the two and ‘plant and machinery’ is not defined in statute; we must therefore turn to case law for guidance.
CIR v Scottish & Newcastle Breweries Ltd [HL 1982, 55 TC 252;  STC 821] concerned décor, murals, light fittings and electrical fittings in some hotels and public houses which were part of its business. They also included decorative items such as bagpipes, pistols, deerskins screwed to the walls and a sculpture representing seagulls in flight. The Inland Revenue disallowed the claims and the company appealed. The Commissioners held that the company’s trade included the provision of ‘atmosphere’, judged in the light of the market that the premises served. The case went to the House of Lords, which upheld the appeal.
Wetherspoons also operate a chain of public houses and have a reputation of refurbishing historic property to provide public houses with a special atmosphere. They installed plywood panels veneered to look like oak, with ogee planted panel mouldings, skirting and decorative friezes. These panels were attached to the walls and columns with softwood battens and were clearly an attractive of the premises. HMRC disallowed the expenditure, claiming that it was ‘part of the premises’. The taxpayer appealed to the Special Commissioners and the First-Tier Tribunal and both parties appealed to the Upper Tribunal.
The Tribunal also considered the cases of Wimpy International Ltd. and Wimpy and Associated restaurants Ltd v Warland [CA 1988, 61 TC 51]. The companies operated chains of restaurants and claimed capital allowances on the replacement of shop fronts, floor and wall tiles, murals, lighting and the installation of new water tanks, staircases and raised floors. The Inland Revenue rejected the claims, but the Special Commissioners allowed the appeals in respect of the decorative items such as murals, decorative brickwork and wall panels. The High Court largely upheld the decision, but held that expenditure on lighting was allowable as plant as it had been specially installed to create an atmosphere of ‘brightness and efficiency’.
The Tribunal in the Wetherspoon case considered that the panelling in this case had not kept a separate identity; it was unremarkable and had merely transformed a room without panelling into a panelled room. This contrasted with the specific items in Scottish and Newcastle which were distinctive embellishments in their own right. Likewise, in the Wimpy case some wall panelling was allowed as plant, but this was no ordinary panelling; it was finished with bronze or silver mirrors or in-fills of Hessian, melamine or a textured sandstone effect and therefore was allowed as plant.
The Tribunal quickly dealt with the appeals relating to cornice work, architraves and balustrade ends. They considered it fanciful to suppose that they retained their separate entities and that they were part of the premises. Premises cannot be plant.
Wetherspoon contended that expenditure on alterations to building, being incidental to the installation of plant included any expenditure incidental to the installation directed to making the plant more usable. Therefore, because:
• The installation of a cooker required walls to be plastered and covered in wipe-clean tiles throughout the kitchen to meet health and Safety requirements;
• The installation of toilet bowls where that previously been no toilet block, in practice required the construction of partitions, dividing walls and the provision of floors with wipe-clean tiled surfaces to enable anyone to use the sanitary ware; and
• The provision of beer-cooling machinery in the cool room necessitated a drain to enable the floor to be cleaned and spilt beer to be disposed of and a slightly inclined floor to direct water to the drain,
it was contended that all the expenditure on building alterations relevant to those items was expenditure ‘incidental to the installation’ of the relevant items of plant.
The claim that the installation of the cooker required the kitchen was rejected. (“the tail wagging the dog”). The building of the kitchen was part of the premises.
The expenditure in respect of the toilet cubicle partitions and the partitions shielding the pipe-work and cisterns was allowable, though the expenditure on the floor and wall tiling was not.
The cold-store floor and drainage system was trade-specific and was essential to expel spilt beer and water from the cold store. These costs were specifically allowable.
Preliminary expenditure had been allowed on a pro rata basis at the First-Tier Tribunal; HMRC claimed that it should be apportioned on an actual basis. The Upper Tribunal decided that this would involve a disproportionate amount of time and that the decision to pro-rate it was sensible. They rejected HMRC’s appeal in this matter.