A hydro-electric scheme needs underground passages to bring water to its turbines. Whether the cost of building them qualified for tax allowances turned on two everyday words in a statutory list. HMRC treated the passages as tunnels or aqueducts. The Supreme Court read those words alongside the other structures on the list and held that neither description covered the disputed works.
SSE Generation Ltd constructed and operates the Glendoe hydro-electric scheme at Fort Augustus. Construction began in February 2006. After a rockfall required rectification, the scheme became fully operational in August 2012. Water taken from a dammed reservoir drives a turbine and is then discharged into Loch Ness. Much of the installation is underground: the generating equipment is in a cavern about 250 metres below ground, a location chosen to optimise water pressure and reduce cost and environmental impact.
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The disputed expenditure, of around £200 million, concerned conduits gathering water diverted to the reservoir, the headrace carrying pressurised water from the reservoir intake, the tailrace discharging spent water into Loch Ness, the turbine outflow tunnel, and the dewatering and drainage tunnels. The gathering conduits included a drilled and blasted underground conduit, a cut and cover concrete conduit, and uncovered lined channels.
The statutory question
Capital expenditure on plant used for a qualifying activity can attract plant and machinery allowances, which are deducted in calculating trading profits for corporation tax. It was not disputed that SSE’s expenditure met those general conditions and was expenditure on plant at common law. Section 22 of the Capital Allowances Act 2001 nevertheless excludes expenditure on a structure or other asset in List B. Item 1 of that list is a tunnel, bridge, viaduct, aqueduct, embankment or cutting. The sweep-up in Item 7 did not apply, because SSE’s electricity generation, transformation and transmission trade fell within a protected-undertaking carve-out. If an item was not a tunnel or an aqueduct, section 22 therefore did not remove the allowance.
Section 23 and List C limit those exclusions. Item 25 of List C includes pipelines or underground ducts or tunnels whose primary purpose is carrying utility conduits. The lists, first introduced in 1994, were intended to draw a line between qualifying plant and non-qualifying buildings and structures, while preserving the effect of earlier decisions and Revenue practice. That purpose does not itself show where the line was drawn.
The decisions below
The First-tier Tribunal treated the List B words as ordinary English grouped by theme. It held that Item 1 concerned transportation infrastructure, so a tunnel had to facilitate access by people or means of transport. None of the disputed items was a tunnel on that basis. It treated an aqueduct as an artificial channel conveying water and held that some items were aqueducts. The Upper Tribunal also rejected the tunnel claim, but held that context confined aqueduct to a bridge-like structure carrying a canal, so none of the items qualified. The Court of Appeal agreed with both conclusions. It found a transportation theme in Item 1 and held that a tunnel is a subterranean passageway for people or vehicles, while an aqueduct is a bridge or viaduct-like structure carrying a canal.
Tunnels and aqueducts in context
Lord Hamblen, with whom Lord Reed, Lord Briggs, Lord Leggatt and Lord Stephens agreed, rejected HMRC’s argument that each word should take its widest ordinary meaning and that the grouping of List B could not narrow it. Both words have more than one ordinary meaning. Nothing in Items 1 to 6 required the widest meaning, and Item 7 showed that Parliament had not needed to use Items 1 to 6 to catch every structure. The grouping was part of the context and could identify which ordinary meaning was intended.
A tunnel may mean any subterranean passage, but it may also mean a roadway or way excavated underground. The link between the Item 1 structures is their relationship to transportation routes or ways of the kinds later listed in Items 2 and 3. A tunnel is therefore a subterranean passage through an obstacle for such a way to pass through. That reading does not conflict with Item 25 of List C: an underground passageway may have the primary purpose of carrying utility conduits. Giving tunnel an unrestricted meaning was not required in order to draw a clear boundary.
An aqueduct can mean a water conduit, but another ordinary and familiar meaning is a bridge-like structure carrying water. In Item 1 it follows bridge and viaduct and sits within the transportation grouping. Lord Hamblen held that it means a bridge-like structure for carrying water. That includes a structure carrying a canal, but is not confined to canals, so the Court of Appeal’s definition was too narrow. A general water-conduit meaning would have nothing in common with the neighbouring words and would largely duplicate canals, dikes and drainage ditches listed elsewhere. The transportation theme still held because the word itself identifies water as what is carried.
HMRC’s wider interpretations of both words were therefore rejected. On the meanings adopted, the Court upheld the Court of Appeal’s decision that the disputed expenditure was not brought within Item 1. SSE’s alternative argument that the items were saved by List C did not need to be decided.
Verdict: The Supreme Court dismissed HMRC’s appeal. The disputed items were not a tunnel or an aqueduct within section 22 List B Item 1, so that provision did not disqualify the expenditure from capital allowances. Whether the items fell within List C was left open as unnecessary.
Source: Commissioners for His Majesty’s Revenue and Customs v SSE Generation Ltd [2023] UKSC 17
