Borehole Capital Allowances

Tax Question

My client has a farming partnership, they have recently paid out over £10,000 on a borehole. The borehole will be used to pump water for the crops they grow on their farm and drinking water for the animals.

In this case would they be able to claim capital allowances on construction and installation costs of this borehole?

Tax Answer

Firstly, it is necessary to look at the underlying legislation to identify whether a borehole qualifies for capital allowances in its own right. For this we need to look at the wording of sections 22 and 23 Capital Allowances Act 2001 (“CAA01”):

S22 – Structures, assets and works

1. For the purposes of this Act, expenditure on the provision of plant or machinery does not include expenditure on—
   1. the provision of a structure or other asset in list B, or
   2. any works involving the alteration of land.

S23 – Expenditure unaffected by sections 21 and 22

22. The alteration of land for the purpose only of installing plant or machinery.

The underlying legislation initially provides a contradiction in approach, s22 denies relief for work done on land, however s23 would allow a claim on work specifically undertaken to install plant and machinery.

As the legislative approach is not definitive, it is necessary to delve further into the meaning of “plant and machinery” for the purpose of the legislation. HMRC provide further guidance in their manual at CA21140.

Plant and Machinery Allowances (PMA): meaning of plant and machinery

Hoffman, J also said that an item used for carrying on the business is not plant if the business use is as the premises (or part of the premises) or place on which the business is conducted – the ‘premises’ test. That is, if the answer to (2) above is ‘yes’, the item is not plant. He made it clear that it does not matter how purpose-built the premises may be they are not plant because they are the premises.

Hoffman J was not using ‘part of the premises’ here to mean the same as whether the item has become part of the realty for the purposes of the law of real property or a fixture for the purposes of the law of landlord and tenant. He suggested four general factors to be considered in deciding whether an item is part of the premises:

1. Does the item appear visually to retain a separate identity?
2. With what degree of permanence has it been attached to the building?
3. To what extent is the structure complete without it?
4. To what extent is it intended to be permanent or alternatively is it likely to be replaced within a short period?

On the basis of the above tests, it would appear to indicate that the borehole would not be part of the premises.

Looking further into this position and in particular the outcome of CHESHIRE CAVITY STORAGE 1 LIMITED and EDF ENERGY (GAS STORAGE HOLE HOUSE) LIMITED V HMRC

HMRC accepted that related costs for boreholes, pipework, pumping and dehydration equipment and control mechanisms qualified for plant and machinery allowances. The dispute was over the cost of preparing the cavities themselves as HMRC disallowed the Capital Allowance claims for both companies and both companies appealed.

On this basis could HMRC argue that the drilling of the borehole would be classed as part of the setting the business is conducted from, however would we then conclude that a claim can still be made on the pipeline and the pump itself.

Therefore, if a claim is accepted for the borehole pipes and pump then surely, we could argue that item 22 in list Cs 23 CAA01, is the alteration of land to install the pipes and the pump.

Finally, as the outcome is subjective on the approach to the works and the drilling could be viewed equally as arising under s22 as under s23 CAA01, the pragmatic approach would be to ensure that the reasoning for the claim was included in the additional information boxes on the tax return and outlining any capital allowances claim made under the guidance referred to above.

Even if HMRC were to reject any element of the capital allowances claim under the plant and machinery rules, a secondary route to relief may be available under structures and buildings allowance legislation. HMRC manuals appear to confirm a claim could be made in CA90300:

Structures and buildings allowance (SBA): outline: meaning of structure.

Anything that qualifies for plant and machinery allowances (taking into account the provisions in CAA01/S21-23) will not qualify for SBA CA94300. It follows that expenditure excluded from being on the provision of plant or machinery by CAA01/S22 (and not within CAA01/S23) may qualify for SBA.

This would make the expenditure on the drilling aspect of the borehole creation eligible for an annual SMA claim of 3% of the cost spread over 33 years.

Gavin Anderton, Tax Consultant