London Luton Hotel BPRA Property Fund LLP v Commissioners of HM Revenue and Customs

Taxation – Capital allowances – Business premises renovation allowance (BPRA) – Appellant company paying development sum on conversion of business premises – Appellant claiming BPRA in respect of payment – Respondent commissioners reducing amount of claim – Both parties appealing against decision of Upper Tribunal on entitlement to allowance – Whether payment qualifying expenditure incurred “on, or in connection with” conversion works – Appellant’s appeal dismissed – Respondents’ appeal allowed in part The appellant company converted a former flight training centre near London Luton Airport which it owned into a Ramada Encore hotel. It claimed business premises renovation allowance (BPRA) of £12,478,201 as capital expenditure “on, or in connection with” the conversion works within section 360B(1)(a) of the Capital Allowances Act 2001. The property was a qualifying building which became “qualifying business premises” within section 360D(1) of the 2001 Act following its conversion and the appellant had incurred the expenditure prior to the expiry date under section 360B(2). However, the respondent commissioners reduced the claim by £5,255,761. The appellant appealed to the First-tier Tribunal (FTT) arguing that it was entitled to BPRA in the full amount claimed because the whole of that amount reflected expenditure incurred under a development agreement that the appellant entered into with a developer for the conversion of the property (the development sums). The FTT held that the entire amount claimed did not qualify for BPRA and disallowed several of the development sums. The Upper Tribunal (UT) upheld the decision that the full amount did not qualify for BPRA but partly reversed the FTT’s disallowance of a number of specific sums. The appellant appealed on the basis that both tribunals had wrongly focused on how the developer was to spend the development sum rather than that the appellant had incurred the expenditure. The respondents appealed against the UT’s allowance of particular development sums as qualifying expenditure. Held: The appellant’s appeal was dismissed. The respondents’ appeal was allowed in part. (1) The issue for the court was whether the disputed expenditure was incurred “in connection with” the conversion of the property. In determining the meaning of the words “in connection with” as they appeared in section 360B(1), there were three points which emerged from their context. First, the words “in connection with” were followed by a short list of the types of work with which the connection had to exist for the expenditure to qualify. The items on that list were linked by a common thread. They were all types of physical work on the particular building. The list comprised works of conversion (section 360B(1)(a)), renovation (section 360B(1)(b)) and incidental repairs (section 360B(1)(c)). It was to be inferred that the focus of the legislation was on the physical works undertaken. The context in which the words appeared in the legislation had some similarity with the context identified in Herons Court v Heronslea [2019] EWCA Civ 1423; [2019] EGLR 44. Physical works were at the heart of the relief. (2) Secondly, section 360B(1) operated when a qualifying building became, by a process of conversion or renovation, “qualifying business premises”. The latter term was defined in section 360D(1) in terms that extended to premises which were “used, or available and suitable for letting for use”, for business purposes (section 360D(1)(b)). The appellant made much of the reference to “used”. But that word was followed by the words “or available and suitable for letting for use”, and the lowest common denominator was the availability of suitable converted premises, not the fact of their use. Here too, the focus was on the physical subject matter of the converted premises in a manner consistent with section 360B(1), and not on their use. (3) Thirdly, the purpose of the legislation was plainly to encourage the conversion and renovation of existing business premises to facilitate their return to business use. The purpose of the measure was to be taken from the legislative scheme, read as a whole. The legislation did not require the premises actually to be used. Allowances could be obtained and retained provided the work was done and the premises became available for letting for at least seven years (ie, the premises satisfied the definition of qualifying business premises for that period), even if they were never actually used. The purpose was therefore to encourage the conversion or renovation of disused properties to make them available for business use, not to provide tax efficient investment opportunities for high net worth individuals. (4) Those contextual features pointed towards the words “in connection with” being construed relatively narrowly. The connection, by inference, had to be with the particular works of conversion (or renovation or repair) which led to the building being, at least, “available and suitable for letting”. It was not necessary that it be used in fact; availability and suitability were sufficient. The scope of expenditure capable of qualifying for allowances could not differ according to whether it resulted in premises that were actually in use, as opposed to being available and suitable for use: Barclays Mercantile Business Finance Ltd v Mawson [2004] UKHL 51; [2005] 1 AC 68 applied. (5) The first task was to construe the relevant legislation in order to determine the nature of the transaction to which that legislation was intended to apply. The second task was to decide whether the actual transaction, viewed realistically, answered that statutory description.   In the present case, the UT and the FTT had erred in their construction of the legislation as part of the first task. Both tribunals thought the words “on, or in connection with” carried a broad meaning. However, the words had to be construed in their statutory context and in the light of the purpose of the legislation. The error of both tribunals was to proceed on the basis that the words carried a broad meaning. Further, the UT was wrong to conclude that the target of the measure was a functioning building which was open for business; it was not. The measure had as its focus the works of conversion, renovation or repair which led to business premises being either used or available and suitable for letting. The UT was materially in error in its construction of section.360B(1). In consequence, and to the extent that it concluded that the appellant was entitled to BPRA on disputed items of expenditure, the UT’s decision had to be set aside. Malcom Gammie KC and Jonathan Bremner KC (instructed by DWF Law LLP) appeared for the appellant; Jonathan Davey KC, John Brinsmead-Stockham KC, Nicholas Macklam and Sam Chandler (instructed by the Solicitor and General Counsel to HMRC) appeared for the HMRC) for the respondents. Eileen O’Grady, barrister Click here to read a transcript of London Luton Hotel BPRA Property Fund LLP v Commissioners of HM Revenue and Customs