While conceived as a ‘back to basics’ discussion on integral features (IFs), the theme of this article develops into questions of interpretation and fundamental tests laid down in case law, which of course are well beyond its scope. However, the concepts and distinctions drawn may be very relevant where substantial sums are involved and the ‘elephant test’ is inadequate. If in doubt, consult a specialist! (All references are to Capital Allowances Act 2001).
What integral features are not
One might be forgiven for thinking that anything which is fixed to a building must be an integral feature. Not so. Chapter 14 is devoted to the topic of ‘fixtures’, i.e. plant or machinery which is installed or fixed in a building so as to become, in law, part of the building (s 173(1)(a)). These rules mainly concern who is entitled to capital allowances (CAs), particularly with regard to leased premises, but should not be conflated with the IFs rules.
A ‘fixture’ may be an IF and, for some reason, s 173(1)(b) specifically identifies a “boiler or water-filled radiator installed in a building as part of a space or water heating system” as a fixture. But built-in cupboards, for example, are likely to be fixtures (the distinction between ‘chattels’ and ‘fixtures’ in buildings is a matter of property law), but are definitely not IFs.
For the purpose of identifying expenditure on plant or machinery qualifying for CAs, ss 21, 22 and 23 provide ‘steers’ at lists A, B and C. List A contains a list of six types of expenditure which are regarded as part of a building and are therefore not plant or machinery:
1. Walls, floors, ceilings, doors, gates, shutters, windows and stairs;
2. Mains services, and systems, for water, electricity and gas;
3. Waste disposal systems;
4. Sewerage and drainage systems;
5. Shafts or other structures in which lifts, hoists, escalators and moving walkways are installed; and
6. Fire safety systems.
List B lists various structures or works which are also not regarded as plant or machinery, such as a tunnel, bridge, road, railway, car park, canal, dam, reservoir, dock and so on.
List C then goes on to list various specific exceptions to Lists A and B, in effect attempting to codify various decisions of the courts which have decided that in the context of the particular trade, a dry dock, for example, may be regarded as plant or machinery.
Needless to say, List A should also not be conflated with IFs. Apart from List C, s 23(2) also lists a number of types of expenditure to which ss 21 and 22 do not apply, which includes IFs; and in fact the only item within List A which includes IFs per se is item 2, i.e. systems for water and electricity (but not gas, though it may qualify as plant – per item 2 of List C).
What integral features are
IFs are defined by s 33A:
1. An electrical system (including a lighting system),
2. A cold water system,
3. A space or water heating system, a powered system of ventilation, air cooling or air purification, and any floor or ceiling comprised in such a system,
4. A lift, an escalator or a moving walkway, and
5. External solar shading.
The introduction of s 33A (by FA 2008) was no doubt welcome as it meant that an electrical system, for example, which previously would not have qualified for CAs at all (other than to meet the requirements of the trade) was potentially eligible. The quid pro quo, however, was that some items which would formerly have qualified as ‘main pool’ plant or machinery (e.g. central heating, lifts) henceforward qualified only for a reduced writing down allowance within the ‘special rate pool’. There is no choice in other words.
‘System’ is not defined by the legislation. HMRC regard an electrical system, for example, thus:
“An electrical system (including a lighting system) is not defined for the purposes of the legislation, so the term takes its ordinary meaning: a system for taking electrical power (including lighting) from the point of entry to the building or structure, or generation within the building or structure, and distributing it through the building or structure, as required. The system may range from the very simplest to the most complex” (CA23300).
HMRC’s guidance goes on to state that electrical wiring for other systems (e.g. communications, fire and burglar alarms) are not part of the electrical system though would qualify as plant within List C.
A moot point is whether the ‘systems’ to which s 33A(5) refers should each be regarded as an ‘entirety’, which is a concept that readers familiar with CAs history will perhaps recall from their student days. Basically, the cost of replacing an ‘entirety’ is capital expenditure while the cost of repair or replacement of part of an entirety is revenue. In Bullcroft Main Collieries Ltd v O’Grady [1932] 17 TC 93, the colliery chimney was replaced by a new one on an adjacent site. It was held that the cost was capital expenditure as the chimney itself was an ‘entirety’ due to its separation from the main buildings. By contrast, in the similar case of Samuel Jones & Co (Devonvale) Ltd v CIR [1951] 32 TC 513, the chimney was an integral part of the company’s factory and so the ‘entirety’ was deemed to be the factory and the cost of replacement was decided to be revenue expenditure.
Prior to the introduction of s 33A, it might also have been relevant to consider the ‘completeness’ and ‘entity’ tests (see CA21150 – 70). In Cole Brothers Ltd. v Phillips [1982] SRC 307, it had been argued that the electrical installation was a single entity. However, the courts adopted a piecemeal approach and rejected a claim that specially designed light fittings and their wiring were plant (among other items). They did, however, allow the claim in relation to transformers and wiring for alarms, clocks and ventilation systems. In the past, HMRC have favoured a piecemeal approach (CA21160) and would only accept that an electrical installation comprised a single entity if certain conditions are satisfied (see CA21180).
So, in short, it gets complicated, and it is not entirely clear what should or should not be regarded as part of the ‘systems’ to which s 33A(5) refers. For example, it is understood that an electrical substation is not regarded as part of the electrical ‘system’. If expenditure is not part of the ‘system’ then of course one would need to apply the usual tests to decide if the costs are part of a building or structure within lists A and B and whether any of the exceptions at list C apply.
Replacement of integral features
The question of what comprises the ‘system’ is also relevant where parts of the installation are replaced, because s 33A(1) refers to the provision or replacement of an integral feature, and where the cost of replacement exceeds 50% of the cost of replacing the (entire) integral feature, s 33B brings the cost within s 33A. As noted above, the cost of repair or replacement of part of an ‘entirety’ is usually revenue expenditure (unless there is an element of improvement), but this may be overridden by s 33B. The HMRC guidance gives some helpful examples at CA22340, CA22350.
Annual investment allowance
Don’t forget that the current annual investment allowance limit of £500,000 reverts to £25,000 for expenditure incurred after 31 December 2015. Obviously, it is desirable to use this first against special rate expenditure and since projects involving IFs may involve some months of planning and preparation, time may be of the essence to take advantage of the £500,000 limit.
Practical Tip:
If a project involving the replacement of a substantial part of an IF is decided, it would be sensible to also obtain an estimate or quote for the entire replacement for the purposes of s 33B, which will involve first identifying what comprises the ‘system’ in question (and bear in mind the provisions of s 33B(3) and (4) where the project is phased over a period of up to twelve months (see examples at CA22340, CA22350).
