In Inmarsat Global Ltd v HMRC [2021] UKUT 59 (TCC), the Upper Tribunal (UT) upheld the First-tier Tribunal's (FTT) decision that a company was not eligible for capital allowances in relation to expenditure incurred by its predecessor on launching satellites into space.

Background

The taxpayer company, Inmarsat Global Ltd (Inmarsat), claimed capital allowances for the costs of launching six satellites into space between the years 1990 and 1996. The satellites were leased to the International Maritime Satellite Organisation (IMSO), the predecessor to Inmarsat. Inmarsat acquired rights in the satellites in 1999, after their launch, as part of a process by which it succeeded to the trade of IMSO.

Inmarsat claimed capital allowances on part of the open market value of the satellites at the date of the business transfer (the claim), arguing that section 61(4), Capital Allowances Act 1990 (CAA 1990) (now section 70, Capital Allowances Act 2001), deemed the satellites to have belonged to IMSO before the transfer and therefore it had succeeded to IMSO’s trade pursuant to section 78(1), CAA 1990. Under section 24, CAA 1990, writing-down allowances could be claimed where capital expenditure was incurred on the provision of machinery and plant for the purposes of a person's trade, in consequence of which the machinery or plant belonged to it.

HMRC refused the claim and a joint referral of the above issues was made to the FTT for determination, under paragraph 31A, Schedule 18, Finance Act 1998. The FTT was asked to determine the following questions:

(1) were the launch costs of the leased satellites capable of attracting capital allowances, and if they were;

(2) was Inmarsat entitled to benefit from any such allowances.

FTT decision

The FTT determined both issues in favour of HMRC. In the view of the FTT, the succession of trade rules in section 78, did not apply as the satellites never belonged to Inmarsat and in any event, the launch costs were not incurred on the provision of machinery or plant.

Inmarsat appealed to the UT.

UT decision

The appeal was dismissed.

The UT agreed with the FTT and rejected Inmarsat's argument that, since section 78(1) deemed the plant to be sold to it, the plant was deemed to belong to it, thereby enabling it to claim capital allowances. The UT commented that had this been the intention of Parliament, section 78 would have contained wording to deal with matters such as when the deemed belonging came to an end and it did not. The UT therefore concluded that section 78 had no application in relation to a successor, such as Inmarsat, unless it became the actual owner of the relevant asset, at which point section 78 would fix the amount of expenditure on which the successor could then claim allowances. It also did not follow that if section 61 had allowed IMSO to claim allowances by deeming the assets to belong to it as lessee, this right would be transferred to Inmarsat under section 78.

Although it did not affect the outcome of the appeal, the UT disagreed with the FTT, agreeing with Inmarsat that the launch expenditure was on the provision of the plant, and that section 61(4) (now section 70(1) and (2), Capital Allowances Act 2001) deemed the plant to belong to the predecessor. The UT was not persuaded that section 61(4) did not permit joint ownership of the plant. While the legislation did not address the consequences of disposal, section 61(4) could still enable each owner to claim allowances on the expenditure that they each had incurred. The UT was also of the view that taxpayers were not prevented from claiming allowances if expenditure was incurred before the term of a lease commenced.

Comment

This decision provides some useful guidance on how the courts are likely to approach cases in which capital allowances on leased assets are sought. In addition to considering the deeming provisions in sections 61(4) and 78(1), the decision provides a helpful summary of the general principles to be applied when construing deeming provisions in statutes.

Given the size of Inmarsat's claim, it would not be surprising if it sought to appeal the UT's decision to the Court of Appeal.

The decision can be viewed here.