Court of Appeal finds for HMRC in first BPRA case

The constituent elements of disputed expenditure were not incurred ‘on or in connection with’ the conversion of a former flight centre.

Flight centre conversion costs disallowed

In the first case on business premises renovation allowances (BPRAs), the Court of Appeal (CA) has upheld HMRC’s decision to refuse BPRAs for expenditure on the conversion of a former flight training centre into a hotel: London Luton Hotel BPRA Property Fund LLP v HMRC [2023] EWCA Civ 362. While the decision will be of particular interest to anyone involved in a BPRA enquiry or dispute, the CA’s ‘realistic assessment’ of the LLP’s expenditure is also potentially relevant to claims for plant and machinery allowances and other capital allowances. Businesses may wish to review their claims, enquiries and disputes in the light of the decision.

BPRAs were a temporary relief intended to incentivise the redevelopment of disused business premises. 100 percent initial allowances were available for expenditure incurred ‘on or in connection with’ conversion and renovation of the premises.

This case concerned £5.2 million spent by an LLP on converting a former flight training centre into a hotel. HMRC refused BPRAs for the expenditure.

Ostensibly, the sum was part of the consideration the LLP paid the developer for developing the premises. However, elements of the sum were contractually earmarked, for example for securing a loan to finance the development and paying promoter fees.

Agreeing with HMRC and the Upper Tribunal (UT), the CA concluded that the sum was not simply part of the consideration for developing the premises. The LLP “knew and intended how the funds would be used” by the developer and had “a material interest in their use … reflected in the significant contractual protections that it obtained”.

The CA then had to determine which of the constituent elements were incurred ‘on or in connection with’ converting the premises.

The CA noted that the interpretation of these words “is heavily dependent both on context and policy.” It inferred that “the focus of the legislation is on the physical works undertaken”. The aim of BPRAs was to encourage redevelopment of disused premises so that they may again be available for business use. It was not to provide tax efficient investment opportunities, albeit this might be a consequence of the relief.

The CA concluded that “these contextual features point towards the words ‘in connection with’ being construed relatively narrowly … as requiring a strong and close nexus with the physical works of conversion, renovation or repair that enable the building to become available and suitable for business use.” It emphasised that this is not a ‘but for’ test.

Agreeing with HMRC (but largely disagreeing with the UT) the CA found that none of the disputed expenditure had been incurred ‘on or in connection with’ the conversion of the premises. On a ‘realistic assessment’ the relationship with the physical works was too remote.

The CA’s interpretation of the legislation and its analysis of what the LLP had spent its money on will be of particular interest to anyone involved in a BPRAs enquiry or dispute.

Businesses may also consider how the decision impacts claims for other allowances, e.g. where the issue is whether expenditure is ‘on the provision of’ plant or machinery. Other cases such as Gunfleet Sands (due to be heard by the UT in early June) are considering this issue. Super-deduction and full expensing are likely to bring increased HMRC scrutiny of claims for plant and machinery allowances, so careful consideration of the emerging case law is recommended.