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January 23, 2017

Telfer v HMRC – Definition of ‘Plant and Machinery’ for Capital Allowances

The First-Tier Tribunal has held that a caravan purchased and used by an employee to enable him to perform his duties does not qualify as being plant or machinery for capital allowances because it failed the ‘necessity’ test outlined in CAA 2001 s36(1).

However the Tribunal did find that the caravan was necessarily for the performance of the employee’s duties and therefore, were the employer to provide the accommodation to the employee for the purposes of the employee’s work, this would be exempt from tax.

The Facts

  • The Caravan Club Ltd (CCL) was involved in the management and upkeep of caravan sites across the UK.
  • Mr Telfer (the taxpayer) was employed by CCL as an assistant warden and was required under the terms of the contract to ‘live on site in [his] own outfit’ and be on call 24 hours a day.
  • The role also required the taxpayer to work at a number of different caravan sites.
  • The taxpayer purchased a caravan and later, a replacement caravan, which were both used as living accommodation at various caravan sites during employment.
  • The taxpayer wrote to HMRC indicating that they wished to claim capital allowances on both caravans on their personal tax returns. HMRC stated that the claims would not qualify for capital allowances and after further discussions, the matter was brought to appeal.

The Rules

1. A claim for plant and machinery for employment will only qualify where the plant or machinery is necessarily provided for use in the performance of the duties of the employment.

2. When determining whether the ‘necessity’ aspect of Rule 1 is satisfied, the functional test will apply.

Where a structure is something by means of which the business activities are in part carried on, the functional test is met as the structure plays a necessary function in the performance of the activities of the business.

However, where a structure plays no part in the carrying on of those activities, but is merely the place within which they are carried on, the functional test is not met as the structure does not play a function in the activities of the business.

The Case

The taxpayer argued that his claim for capital allowances should be allowed as he had incurred qualifying expenditure (the purchase of the caravans) as a result of carrying on a qualifying activity (the taxpayer’s employment).

HMRC opposed this interpretation and contented that the caravan was not ‘for use in doing the work of the employment’. The requirement for the caravan to be necessarily provided for the use and duties of the taxpayer was a ‘rigorous test’ and that the duties of the employment itself would require the caravan.

The Decision

The Tribunal noted the functional test set out in the Yard Arm Club Ltd case, and drew the distinction between a structure which either:

a) is something by means of which the business activities are in part carried on; or

b) plays no part in the carrying on of those activities, but is merely the place within which they are carried on.

On analysis of the taxpayer’s duties, they found that the caravan was not something by means of which those duties were in part carried on, but were instead structures within which those duties could be performed. The caravan therefore did not pass the functional test and could not be regarded as a plant for capital allowances.

However, the Tribunal did agree that, given the nature of the taxpayer’s role (i.e. the requirement to be on site at all times and to regularly move site each season), the caravan was necessary for their employment.  As such, the employer could offer such accommodation to an employee for use in the performance of their duties without causing them to incur a taxable benefit.

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